**Table of Contents**

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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

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**x****                             ****QUARTERLY REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2009**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition periodfrom                   to**

** **

**Commissionfile number 1-14762**

 

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**THE SERVICEMASTER COMPANY**

(Exact name of registrantas specified in its charter)

** **

| **Delaware**                                                                                | ** ** | **36-3858106**                                   |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------|
| (State or other jurisdiction ofincorporation or organization) |       | (IRS Employer Identification No.) |

** **

**860 RidgeLake Boulevard, Memphis, Tennessee**·**38120**

(Address of principalexecutive offices)   (Zip Code)

 

**901-597-1400**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer x                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Act).  Yes  o  No x

 

The registrant isa privately held corporation and its equity shares are not publicly traded. At May 8,2009, 1,000 shares of the registrant’s common stock were outstanding, all ofwhich were owned by CDRSVM Holding, Inc.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **                                                                                                               | **Page  No.** |
|--------------------------------------------------------------------------------------------------------------------------|---------------|
| THE SERVICEMASTER COMPANY (Registrant) -                                                                                 |          |
|                                                                                                                     |          |
| Part I. Financial Information                                                                                       |          |
|                                                                                                                     |          |
| Item 1: Financial Statements  (Unaudited)                                                                                |          |
|                                                                                                                     |          |
| Condensed Consolidated Statements  of Operations for the three months ended March 31, 2009 and  March 31, 2008 | 3             |
|                                                                                                                     |          |
| Condensed Consolidated  Statements of Financial Position as of March 31, 2009 and  December 31, 2008           | 4             |
|                                                                                                                     |          |
| Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2009 and March 31, 2008 | 5             |
|                                                                                                                     |          |
| Notes to Condensed Consolidated  Financial Statements                                                                    | 6             |
|                                                                                                                     |          |
| Item 2: Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      | 25            |
|                                                                                                                     |          |
| Item  3: Quantitative and Qualitative Disclosures About Market Risk                                                 | 40            |
|                                                                                                                     |          |
| Item 4T: Controls  and Procedures                                                                                        | 40            |
|                                                                                                                     |          |
| Part II. Other  Information                                                                                         | 41            |
|                                                                                                                     |          |
| Item  6: Exhibits                                                                                                        | 41            |
|                                                                                                                     |          |
| Signature                                                                                                                | 41            |

 

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

### **THE SERVICEMASTER COMPANY**

### **Condensed Consolidated Statements of Operations (Unaudited)**

*(Inthousands)*

* *
| ** **                                                                    | ** ** | **Three months ended****March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| Operating Revenue                                                        |       | $                                                  | 645,927    |   | $ | 632,231 |   |
|                                                                          |       |                                               |       |   |   |
| Operating Costs and Expenses:                                  |       |                                               |       |   |   |
| Cost of services rendered and products sold     |       | 394,400                                            |       | 417,368 |   |
| Selling and administrative expenses                            |       | 173,763                                            |       | 171,116 |   |
| Amortization expense                                                          |       | 40,309                                             |       | 50,674 |   |
| Merger related charges                                                        |       | 294                                                |       | 50 |   |
| Restructuring charges                                                         |       | 8,483                                              |       | 3,325 |   |
| Total operating costs and expenses                        |       | 617,249                                            |       | 642,533 |   |
|                                                                          |       |                                               |       |   |   |
| Operating Income (Loss)                                                  |       | 28,678                                             |       | (10,302 | ) |
|                                                                          |       |                                               |       |   |   |
| Non-operating Expense (Income):                                     |       |                                               |       |   |   |
| Interest expense                                                         |       | 76,666                                             |       | 89,586 |   |
| Interest and net investment loss                               |       | 4,761                                              |       | 6,045 |   |
| Gain on extinguishment of debt                                                |       | (46,106                                            | )          | — |   |
| Other expense                                                            |       | 200                                                |       | 132 |   |
|                                                                          |       |                                               |       |   |   |
| Loss from Continuing Operations  before Income Taxes |       | (6,843                                             | )          | (106,065 | ) |
| Benefit for income taxes                                            |       | (7,555                                             | )          | (30,971 | ) |
|                                                                          |       |                                               |       |   |   |
| Income (Loss)  from Continuing Operations                           |       | 712                                                |       | (75,094 | ) |
|                                                                          |       |                                               |       |   |   |
| Loss from discontinued operations, net of  income taxes                       |       | (163                                               | )          | (748 | ) |
| Net Income (Loss)                                                        |       | $                                                  | 549        |   | $ | (75,842 | ) |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

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**THESERVICEMASTER COMPANY**

## **Condensed Consolidated Statementsof Financial Position (Unaudited)**

*(Inthousands, except share data)*

 
| ** **                                                                   | ** ** | **As of****March 31,  2009** | ** ** | **As of****December 31,  2008** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|
| Assets                                                                       |       |                                   |       |                                      |       |
| Current  Assets:                                                             |       |                                   |       |                                      |       |
| Cash  and cash equivalents                                                   |       | $                                      | 288,316    |                                      | $          | 405,587 |   |
| Marketable  securities                                                       |       | 19,285                                 |       | 22,928                                    |       |
| Receivables,  less allowance of $20,251 and $21,138, respectively            |       | 331,777                                |       | 335,927                                   |       |
| Inventories                                                                  |       | 86,125                                 |       | 80,018                                    |       |
| Prepaid  expenses and other assets                                           |       | 95,888                                 |       | 37,648                                    |       |
| Deferred  customer acquisition costs                                         |       | 58,230                                 |       | 36,514                                    |       |
| Deferred  taxes                                                              |       | 42,177                                 |       | 42,945                                    |       |
| Assets  of discontinued operations                                           |       | 177                                    |       | 412                                       |       |
| Total  Current Assets                                                        |       | 921,975                                |       | 961,979                                   |       |
| Property  and Equipment:                                                     |       |                                   |       |                                      |       |
| At  cost                                                                     |       | 307,402                                |       | 287,818                                   |       |
| Less:  accumulated depreciation                                              |       | (87,036                                | )          | (72,189                                   | )          |
| Net  property and equipment                                                  |       | 220,366                                |       | 215,629                                   |       |
|                                                                         |       |                                   |       |                                      |       |
| Other  Assets:                                                               |       |                                   |       |                                      |       |
| Goodwill                                                                     |       | 3,095,086                              |       | 3,093,909                                 |       |
| Intangible assets, primarily trade names,  service marks and trademarks, net |       | 2,929,064                              |       | 2,967,984                                 |       |
| Notes  receivable                                                            |       | 24,433                                 |       | 25,628                                    |       |
| Long-term  marketable securities                                             |       | 103,570                                |       | 110,134                                   |       |
| Other  assets                                                                |       | 35,165                                 |       | 35,350                                    |       |
| Debt  issuance costs                                                         |       | 77,453                                 |       | 83,014                                    |       |
| Total  Assets                                                                |       | $                                      | 7,407,112  |                                      | $          | 7,493,627 |   |
|                                                                         |       |                                   |       |                                      |       |
| Liabilities and  Shareholder’s Equity                                   |       |                                   |       |                                      |       |
|                                                                         |       |                                   |       |                                      |       |
| Current  Liabilities:                                                        |       |                                   |       |                                      |       |
| Accounts  payable                                                            |       | $                                      | 120,332    |                                      | $          | 89,242 |   |
| Accrued  liabilities:                                                        |       |                                   |       |                                      |       |
| Payroll  and related expenses                                                |       | 71,956                                 |       | 83,036                                    |       |
| Self-insured  claims and related expenses                                    |       | 76,396                                 |       | 91,923                                    |       |
| Other                                                                        |       | 146,519                                |       | 202,174                                   |       |
| Deferred  revenue                                                            |       | 501,489                                |       | 443,426                                   |       |
| Liabilities  of discontinued operations                                      |       | 2,963                                  |       | 4,870                                     |       |
| Current  portion of long-term debt                                           |       | 220,812                                |       | 221,269                                   |       |
| Total  Current Liabilities                                                   |       | 1,140,467                              |       | 1,135,940                                 |       |
|                                                                         |       |                                   |       |                                      |       |
| Long-Term  Debt                                                              |       | 3,945,661                              |       | 4,044,823                                 |       |
|                                                                         |       |                                   |       |                                      |       |
| Other  Long-Term Liabilities:                                                |       |                                   |       |                                      |       |
| Deferred  taxes                                                              |       | 977,624                                |       | 981,746                                   |       |
| Liabilities  of discontinued operations                                      |       | 4,126                                  |       | 4,077                                     |       |
| Other  long-term obligations, primarily self-insured claims                  |       | 204,862                                |       | 194,682                                   |       |
| Total  Other Long-Term Liabilities                                           |       | 1,186,612                              |       | 1,180,505                                 |       |
|                                                                         |       |                                   |       |                                      |       |
| Commitments and  Contingencies (See Note 4)                                  |       |                                   |       |                                      |       |
|                                                                         |       |                                   |       |                                      |       |
| Shareholder’s  Equity:                                                  |       |                                   |       |                                      |       |
| Common  stock $0.01 par value, authorized 1,000 shares; issued 1,000 shares  |       | —                                 |       | —                                    |       |
| Additional  paid-in capital                                                  |       | 1,440,367                              |       | 1,438,432                                 |       |
| Retained  deficit                                                            |       | (249,370                               | )          | (249,919                                  | )          |
| Accumulated  other comprehensive loss                                        |       | (56,625                                | )          | (56,154                                   | )          |
| Total  Shareholder’s Equity                                             |       | 1,134,372                              |       | 1,132,359                                 |       |
| Total  Liabilities and Shareholder’s Equity                             |       | $                                      | 7,407,112  |                                      | $          | 7,493,627 |   |

 

*See accompanying Notes to the CondensedConsolidated Financial Statements*

 

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**THESERVICEMASTER COMPANY**

## **Condensed Consolidated Statementsof Cash Flows (Unaudited)**

*(In thousands)*

 
| ** **                                                                         | ** ** | **Three months ended****March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| Cash and Cash Equivalents at Beginning of  Period                                  |       | $                                                  | 405,587    |   | $ | 207,219 |   |
|                                                                               |       |                                               |       |   |   |
| Cash Flows from Operating Activities from Continuing  Operations:                  |       |                                               |       |   |   |
| Net Income (Loss)                                                                  |       | 549                                                |       | (75,842 | ) |
| Adjustments to reconcile net loss to net cash  provided from operating activities: |       |                                               |       |   |   |
| Loss from discontinued operations                                                  |       | 163                                                |       | 748 |   |
| Depreciation expense                                                               |       | 15,614                                             |       | 12,558 |   |
| Amortization expense                                                               |       | 40,309                                             |       | 50,674 |   |
| Amortization of debt issuance costs                                                |       | 3,768                                              |       | 9,245 |   |
| Gain on extinguishment of debt                                                     |       | (46,106                                            | )          | — |   |
| Deferred income tax benefit                                                        |       | (2,280                                             | )          | (36,589 | ) |
| Option and restricted stock expense                                                |       | 1,934                                              |       | 1,664 |   |
| Restructuring charges                                                              |       | 8,483                                              |       | 3,325 |   |
| Cash payments related to restructuring charges                                     |       | (4,296                                             | )          | (13,874 | ) |
| Merger related charges                                                             |       | 294                                                |       | 50 |   |
| Change in working capital, net of acquisitions:                                    |       |                                               |       |   |   |
| Current income taxes                                                               |       | (3,026                                             | )          | 5,182 |   |
| Receivables                                                                        |       | 6,001                                              |       | 12,971 |   |
| Inventories and other current assets                                               |       | (87,560                                            | )          | (95,764 | ) |
| Accounts payable                                                                   |       | 26,548                                             |       | 28,326 |   |
| Deferred revenue                                                                   |       | 58,033                                             |       | 84,953 |   |
| Accrued liabilities                                                                |       | (75,177                                            | )          | (54,835 | ) |
| Other, net                                                                         |       | 9,141                                              |       | 1,678 |   |
| Net Cash Used for Operating Activities from  Continuing Operations                 |       | (47,608                                            | )          | (65,530 | ) |
|                                                                               |       |                                               |       |   |   |
| Cash Flows from Investing Activities from  Continuing Operations:                  |       |                                               |       |   |   |
| Property additions                                                                 |       | (18,608                                            | )          | (9,049 | ) |
| Sale of equipment and other assets                                                 |       | 362                                                |       | 711 |   |
| Acquisition of The ServiceMaster Company                                           |       | (486                                               | )          | (16,163 | ) |
| Other business acquisitions, net of cash  acquired                                 |       | (4,871                                             | )          | (4,385 | ) |
| Notes receivable, financial investments and  securities, net                       |       | 3,536                                              |       | 14,370 |   |
| Net Cash Used for Investing Activities from  Continuing Operations                 |       | (20,067                                            | )          | (14,516 | ) |
|                                                                               |       |                                               |       |   |   |
| Cash Flows from Financing Activities from  Continuing Operations:                  |       |                                               |       |   |   |
| Borrowings of debt                                                                 |       | —                                             |       | 76,350 |   |
| Payments of debt                                                                   |       | (47,504                                            | )          | (52,793 | ) |
| Debt issue costs paid                                                              |       | (198                                               | )          | — |   |
| Net Cash (Used for) Provided from Financing Activities from  Continuing Operations |       | (47,702                                            | )          | 23,557 |   |
|                                                                               |       |                                               |       |   |   |
| Cash Flows from Discontinued Operations:                                           |       |                                               |       |   |   |
| Cash (used for) provided from operating  activities                                |       | (980                                               | )          | 4,560 |   |
| Cash used for investing activities                                                 |       | (914                                               | )          | (44 | ) |
| Cash used for financing activities                                                 |       | —                                             |       | (51 | ) |
| Net Cash (used for) Provided from Discontinued  Operations                         |       | (1,894                                             | )          | 4,465 |   |
|                                                                               |       |                                               |       |   |   |
| Cash Decrease During the Period                                                    |       | (117,271                                           | )          | (52,024 | ) |
|                                                                               |       |                                               |       |   |   |
| Cash and Cash Equivalents at End of Period                                         |       | $                                                  | 288,316    |   | $ | 155,195 |   |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

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**THESERVICEMASTER COMPANY**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**Note 1.Basis of Presentation**

 

The condensedconsolidated financial statements include the accounts of The ServiceMasterCompany and its subsidiaries, collectively referred to as the “Company” or “ServiceMaster”.

 

On March 18,2007, ServiceMaster entered into an Agreement and Plan of Merger (the “MergerAgreement”) with ServiceMaster Global Holdings, Inc. (formerly CDRSVMTopco, Inc.) (“Holdings”) and CDRSVM Acquisition Co., Inc., anindirect wholly owned subsidiary of Holdings (“Acquisition Co.”). The MergerAgreement provided that, upon the terms and subject to the conditions set forthin the Merger Agreement, Acquisition Co. would merge with and intoServiceMaster, with ServiceMaster as the surviving corporation (the “Merger”).

 

On July 24,2007 (the “Closing Date”), the Merger was completed, and each issued andoutstanding share of ServiceMaster common stock, other than shares held byServiceMaster or Holdings or their subsidiaries and shares held by stockholderswho validly perfected their appraisal rights under Delaware law, was convertedinto the right to receive $15.625 in cash (the “Merger Consideration”). Eachshare of ServiceMaster common stock owned by ServiceMaster, Holdings orAcquisition Co. or any of their respective direct or indirect wholly-ownedsubsidiaries was cancelled and retired, and no consideration was paid inexchange for it.

 

Immediatelyfollowing the completion of the Merger, all of the outstanding capital stock ofHoldings, the ultimate parent company of ServiceMaster, was owned by investmentfunds sponsored by, or affiliated with, Clayton, Dubilier & Rice, Inc.(“CD&R”), Citigroup Private Equity L.P., BAS Capital FundingCorporation and J.P. Morgan Ventures Corporation (collectively, the “EquitySponsors”).

 

Equitycontributions totaling $1,431 million from the Equity Sponsors, togetherwith (i) borrowings under a new $1,150 million senior unsecuredinterim loan facility (“Interim Loan Facility”), (ii) borrowings under anew $2,650 million senior secured term loan facility and (iii) cashon hand at ServiceMaster, were used, among other things, to finance theaggregate Merger Consideration, to make payments in satisfaction of otherequity-based interests in ServiceMaster under the Merger Agreement, to settleexisting interest rate swaps, to redeem or provide for the repayment of certainof the Company’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150 millionpre-funded letter of credit facility (together with the senior secured termloan facility, the “Term Facilities”) were used to replace and/or secureletters of credit previously issued under a ServiceMaster credit facility thatwas terminated as of the Closing Date. On the Closing Date, the Company alsoentered into, but did not draw under, a new $500 million senior securedrevolving credit facility (the “Revolving Credit Facility”).

 

The Interim LoanFacility matured on July 24, 2008. On the maturity date, outstandingamounts under the Interim Loan Facility were converted on a one to one basisinto 10.75%/11.50% senior toggle notes maturing in 2015 (“Permanent Notes”).The Permanent Notes were issued pursuant to a refinancing indenture. Inconnection with the issuance of Permanent Notes, ServiceMaster entered into aregistration rights agreement (the “Registration Rights Agreement”), pursuantto which ServiceMaster filed with the SEC a registration statement with respectto the resale of the Permanent Notes, which was declared effective on January 16,2009.  ServiceMaster’s obligation underthe Registration Rights Agreement to keep the registration statement effectivehas terminated.  Accordingly,ServiceMaster may choose to deregister the Permanent Notes and terminate theeffectiveness of the registration statement at any time.

 

 The condensed consolidated financialstatements have been prepared by the Company in accordance with generallyaccepted accounting principles in the United States (“GAAP”) and pursuant tothe rules and regulations of the Securities and Exchange Commission (“SEC”).The Company recommends that the quarterly condensed consolidated financialstatements be read in conjunction with the condensed consolidated financialstatements and the notes thereto included in the Company’s Annual Report on Form 10-Kfiled with the SEC for the year ended December 31, 2008. The condensedconsolidated financial statements reflect all adjustments which are, in theopinion of management, necessary for the fair presentation of the financialposition, results of operations and cash flows for the interim periodspresented. All intercompany transactions and balances have been eliminated inconsolidation. The results of operations for any interim period are notnecessarily indicative of the results which might be achieved for a full year.

 

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**Note 2. Significant AccountingPolicies**

 

The Company’s significantaccounting policies are included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008. The following selected accountingpolicies should be read in conjunction with that Annual Report on Form 10-K.

 

Revenues from lawn careand pest control services, as well as liquid and fumigation termiteapplications, are recognized as the services are provided. Revenues fromlandscaping services are recognized as they are earned based upon contractarrangements or when services are performed for non-contractual arrangements.The Company eradicates termites through the use of baiting systems, as well asthrough non-baiting methods (e.g., fumigation or liquid treatments). Termiteservices using baiting systems, termite inspection and protection contracts, aswell as home warranty services, are frequently sold through annual contractsfor a one-time, upfront payment. Direct costs of these contracts (service costsfor termite contracts and claim costs for warranty contracts) are expensed asincurred. The Company recognizes revenue over the life of these contracts inproportion to the expected direct costs. Those costs bear a direct relationshipto the fulfillment of the Company’s obligations under the contracts and arerepresentative of the relative value provided to the customer (proportionalperformance method). Home warranty contract revenue is recognized based on theexpected emergence of total claim costs. The Company regularly reviews itsestimates of direct costs for its termite bait and home warranty contracts andadjusts the estimates when appropriate. Revenue from trade name licensingarrangements is recognized when earned.

 

The Company has franchiseagreements in its TruGreen LawnCare, Terminix, ServiceMaster Clean, MerryMaids, AmeriSpec and Furniture Medic businesses. Franchise revenue (which inthe aggregate represents approximately four percent of consolidated revenuefrom continuing operations) consists principally of continuing monthly feesbased upon the franchisee’s customer level revenue. Monthly fee revenue isrecognized when the related customer level revenue is reported by thefranchisee and collectability is assured. Franchise revenue also includesinitial fees resulting from the sale of a franchise. These fees are fixed andare recognized as revenue when collectability is assured and all materialservices or conditions relating to the sale have been substantially performed.Total profits from the franchised operations (excluding trade name licensing)were approximately $15.8 million**and $13.8million for the three months ended March 31, 2009 and 2008, respectively,and consolidated operating income (loss) from continuing operations wasapproximately $28.7 million and ($10.3) million for the three months ended March 31,2009 and 2008, respectively. We evaluate the performance of our franchisebusinesses based primarily on operating profit before corporate general andadministrative expenses, interest expense and amortization of intangibleassets. The portion of total franchise fee income related to initial feesreceived from the sale of franchises was immaterial to the Company’s condensedconsolidated financial statements for all periods.

 

The Company had $501.5million and $443.4 million of deferred revenue at March 31, 2009 and December 31,2008, respectively. Deferred revenue consists primarily of payments receivedfor annual contracts relating to home warranty, termite baiting, termiteinspection, pest control and lawn care services.

 

Customer acquisitioncosts, which are incremental and direct costs of obtaining a customer, aredeferred and amortized over the life of the related contract in proportion torevenue recognized. These costs include sales commissions and direct sellingcosts which can be shown to have resulted in a successful sale.

 

TruGreen LawnCare hassignificant seasonality in its business. In the winter and spring, thisbusiness sells a series of lawn applications to customers which are renderedprimarily in March through October (the production season). Thisbusiness incurs incremental selling expenses at the beginning of the year thatdirectly relate to successful sales for which the revenues are recognized inlater quarters. On an interim basis, TruGreen LawnCare defers these incrementalselling expenses, pre-season advertising costs and annual repairs andmaintenance procedures that are performed primarily in the first quarter. Thesecosts are deferred and recognized in proportion to the contract revenue overthe production season, and are not deferred beyond the calendar year-end. Otherbusiness segments of the Company also defer, on an interim basis, advertisingcosts incurred early in the year. These pre-season costs are deferred andrecognized approximately in proportion to revenue over the balance of the yearand are not deferred beyond the calendar year-end.

 

The cost ofdirect-response advertising at Terminix and TruGreen LawnCare, consistingprimarily of direct-mail promotions, is capitalized and amortized over itsexpected period of future benefits.

 

The fair values of theCompany’s financial instruments reflect the amounts that would be received to sellan asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date (exit price). The fair valueestimates presented in this report are based on information available to theCompany as of March 31, 2009 and December 31, 2008.

 

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The preparation of thecondensed consolidated financial statements requires management to make certainestimates and assumptions required under GAAP which may differ from actualresults. Disclosures in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2008 presented the significant areas that requirethe use of management’s estimates and discussed how management formed itsjudgments. The areas discussed included revenue recognition; the allowance foruncollectible receivables; accruals for self-insured retention limits relatedto medical, workers’ compensation, auto and general liability insurance claims;accruals for home warranty and termite damage claims; the possible outcome ofoutstanding litigation; accruals for income tax liabilities as well as deferredtax accounts; the deferral and amortization of customer acquisition costs;useful lives for depreciation and amortization expense; the valuation ofmarketable securities; and the valuation of tangible and intangible assets.

 

**Note 3. Restructuring Charges**

 

The Company is engaged ina reorganization and restructuring of certain of its businesses and supportfunctions known as Fast Forward. Among the purposes of Fast Forward is toeliminate layers and bureaucracy and simplify work processes in order to betteralign the Company’s work processes around its operational and strategicobjectives. Fast Forward is being implemented in phases. The first phaseinvolved, among other things, a reduction in work force and various processimprovements, including the closing of American Home Shield’s call centerlocated in Santa Rosa, California. The second phase includes, among otherthings, the organization of certain corporate support functions into centers ofexcellence which are expected to deliver higher quality services to ourbusiness units at lower costs, the outsourcing to third party vendors ofvarious business activities that currently are handled internally, as well asother employee workforce reductions expected to result in cost-savings.

 

The first phase of FastForward was substantially completed in the first quarter of 2008, and thesecond phase is underway. As part of the second phase of Fast Forward, on December 11,2008, the Company entered into an agreement with International BusinessMachines Corporation (“IBM”) pursuant to which IBM will provide information technologyoperations and applications development services to the Company. The initialterm of the agreement is seven years. The agreement commenced on December 11,2008 and the services are expected to be phased in over approximately asix-month period. In connection with the agreement, the Company expects toeliminate approximately 275 positions. As a result of the elimination ofpositions and the transition of information technology services to IBM, theCompany has incurred and expects to continue to incur charges related to, amongother things, employee retention and severance costs and transition fees paidto IBM. Almost all charges related to the agreement will be cash charges andwill be expensed throughout the transition period. Such charges are expected toamount to $10 to $15 million, pre-tax, and will be recorded as restructuringcharges in the condensed consolidated statement of operations principally inthe first half of 2009.

 

In connection with FastForward, the Company incurred costs of approximately $5.3 million ($3.2million after-tax) and $2.6 million ($1.5 million after-tax) for the threemonths ended March 31, 2009 and 2008, respectively. For the three monthsended March 31, 2009, such costs included transition fees paid to IBM ofapproximately $3.8 million, employee retention and severance costs ofapproximately $0.9 million and consulting and other costs of approximately $0.6million. For the three months ended March 31, 2008, these charges includedconsulting fees of approximately $1.6 million and severance and other costs ofapproximately $1.0 million.

 

For the three monthsended March 31, 2009, Terminix incurred restructuring costs ofapproximately $3.2 million ($2.0 million after-tax) relating to a branchoptimization project, which included approximately $2.9 million of leasetermination costs and approximately $0.3 million of severance costs.

 

The results for the threemonths ended March 31, 2008 include restructuring charges related to theCompany’s consolidation of its corporate headquarters into its operationssupport center in Memphis, Tennessee and the closing of its headquarters inDowners Grove, Illinois. The transition to Memphis was substantially completedin 2007. Almost all costs related to the transition were cash expenditures and wereexpensed throughout the transition period. During the three months ended March 31,2008, the Company incurred $0.7 million ($0.4 million after-tax) relating tothis relocation, which includes severance and other costs.

 

The pretax charges discussedabove are reported in the “Restructuring charges” line in the condensedconsolidated statements of operations.

 

**Note 4. Commitments andContingencies**

 

A portion of the Company’svehicle fleet and some equipment are leased through operating leases. The leaseterms are non-cancelable for the first twelve-month term, and then aremonth-to-month, cancelable at the Company’s option. There 

 

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are residual valueguarantees by the Company (ranging from 70 percent to 84 percent ofthe estimated terminal value at the inception of the lease depending on theagreement) relative to these vehicles and equipment, which historically havenot resulted in significant net payments to the lessors. At March 31,2009, there was approximately $103 million of residual value relating tothe Company’s fleet and equipment leases. The fair value of the assets underall of the fleet and equipment leases is expected to substantially mitigate theCompany’s guarantee obligations under the agreements. At March 31, 2009,the Company has recorded the estimated fair value of this guarantee ofapproximately $2 million in the condensed consolidated statement offinancial position.

 

The Company maintainslease facilities with banks totaling $65 million, which provide for thefinancing of branch properties to be leased by the Company. At March 31,2009, approximately $65 million was funded under these facilities.Approximately $12 million of these leases are treated as capital leases andhave been included on the balance sheet as assets with related debt as of March 31,2009. The balance of the funded amount is treated as operating leases. TheCompany has guaranteed the residual value of the properties under the leases upto 73 percent of the fair market value at the commencement of the lease.At March 31, 2009, the Company’s residual value guarantee related to theleased assets totaled $53 million for which the Company has recorded theestimated fair value of this guarantee of approximately $0.1 million inthe condensed consolidated statements of financial position. In connection withthe closing of the Merger, the Company amended these leases effective July 24,2007. Among the modifications, the Company extended the lease terms through July 24,2010. The operating lease and capital lease classifications of these leases didnot change as a result of the modifications.

 

The Company carriesinsurance policies on insurable risks at levels that it believes to beappropriate, including workers’ compensation, auto and general liability risks.The Company purchases insurance from third-party insurance carriers. Thesepolicies typically incorporate significant deductibles or self-insuredretentions. The Company is required to pay all claims that fall below theretention limits. As of March 31, 2009 and December 31, 2008, theCompany had accrued self-insured claims of $143 million and $146 million,respectively. During the three months ended March 31, 2009 and 2008, theCompany recorded provisions for uninsured claims totaling $9 million and $8million, respectively, and the Company paid claims totaling $12 million and $14million, respectively. In determining the Company’s accrual for self-insuredclaims, the Company uses historical claims experience to establish both thecurrent year accrual and the underlying provision for future losses. Thisactuarially determined provision and related accrual includes both known claims,as well as incurred but not reported claims. The Company adjusts its estimateof accrued self-insured claims when required to reflect changes based onfactors such as changes in health care costs, accident frequency and claimseverity.

 

Accruals for warrantyclaims in the American Home Shield business are made based on the Company’sclaims experience and actuarial projections. Termite damage claim accruals arerecorded based on both the historical rates of claims incurred within acontract year and the cost per claim. Current activity could differ causing achange in estimates. The Company has certain liabilities with respect toexisting or potential claims, lawsuits and other proceedings. The Companyaccrues for these liabilities when it is probable that future costs will beincurred and such costs can be reasonably estimated. Any resulting adjustments,which could be material, are recorded in the period the adjustments areidentified.

 

The Company hasguarantees on certain bonds issued by divested companies, primarily performancetype bonds. The maximum payments the Company could be required to make if thebuyers of the divested companies are unable to fulfill their obligations isapproximately $0.6 million at March 31, 2009. Substantially all ofthe bonds are scheduled to expire in 2009, but may be extended depending on thecompletion of the related projects. The Company believes that if it were toincur a loss on any individual bond guarantee, the likelihood of which theCompany believes is remote, such loss would not have a material effect on theCompany’s business, financial condition, annual results of operations or cashflows.

 

In the ordinary course ofconducting its business activities, the Company becomes involved in judicial,administrative and regulatory proceedings involving both private parties andgovernmental authorities. These proceedings include general and commercialliability and employment actions as well as environmental proceedings. TheCompany does not expect any of these proceedings to have a material effect onthe Company’s business, financial condition, annual results of operations orcash flows.

 

**Note 5. Goodwill and IntangibleAssets**

 

Inaccordance with SFAS No. 142, “Goodwill and Other Intangible Assets”,goodwill and intangible assets that are not amortized are subject to assessmentfor impairment by applying a fair-value based test on an annual basis or morefrequently if circumstances indicate a potential impairment. The Company’sannual assessment date is October 1.

 

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The table belowsummarizes the goodwill balances by segment for continuing operations:

 
| **(In thousands)**        | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home  Shield** | ** ** | **Other  Operations &  Headquarters** | ** ** | **Total** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Balance at Dec. 31, 2008  |       | $                      | 1,161,507  |                   | $          | 45,782       |       | $                          | 1,352,799  |                                           | $          | 348,309   |       | $ | 185,512 |   | $ | 3,093,909 |   |
| Acquisitions                   |       | 370                    |       | —                 |       | 1,674        |       | —                     |       | 118                                            |       | 2,162     |       |
| Other (1)                      |       | (181                   | )          | (484                   | )          | (196         | )          | (74                        | )          | (50                                            | )          | (985      | )          |
| Balance at March 31, 2009 |       | $                      | 1,161,696  |                   | $          | 45,298       |       | $                          | 1,354,277  |                                           | $          | 348,235   |       | $ | 185,580 |   | $ | 3,095,086 |   |

 

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(1)           Reflects the amortization of taxdeductible goodwill.

 

The table belowsummarizes the other intangible asset balances for continuing operations:

 
| ** **              | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **(In thousands)** | ** ** | **Gross**                    | ** ** | **Accumulated  Amortization**   | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Trade names(1)          |       | $                            | 2,408,100  |                            | $          | — |   | $ | 2,408,100 |   | $ | 2,408,100 |   | $ | — |   | $ | 2,408,100 |   |
| Customer relationships  |       | 661,824                      |       | (245,095                        | )          | 416,729 |   | 660,677 |   | (209,485 | ) | 451,192 |   |
| Franchise agreements    |       | 88,000                       |       | (18,807                         | )          | 69,193 |   | 88,000 |   | (16,270 | ) | 71,730 |   |
| Other                   |       | 49,630                       |       | (14,588                         | )          | 35,042 |   | 49,395 |   | (12,433 | ) | 36,962 |   |
| Total                   |       | $                            | 3,207,554  |                            | $          | (278,490 | ) | $ | 2,929,064 |   | $ | 3,206,172 |   | $ | (238,188 | ) | $ | 2,967,984 |   |

 

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(1)           Not subject to amortization.

 

**Note 6. Stock-Based Compensation**

 

During the three monthsended March 31, 2009 and 2008, the Company recognized compensation cost ofapproximately $1.9 million ($1.1 million after-tax) and $1.7 million ($1.2million after-tax), respectively. As of March 31, 2009, there wasapproximately $21.7 million of total unrecognized compensation cost related tonon-vested stock options granted by Holdings under the ServiceMaster GlobalHoldings, Inc. Stock Incentive Plan. These remaining costs are expected tobe recognized over a weighted-average period of 2.8 years.

 

**Note 7.Supplemental Cash Flow Information**

 

In the condensedconsolidated statements of cash flows, the caption “Cash and cash equivalents”includes investments in short-term, highly-liquid securities having a maturityof three months or less when purchased. Supplemental information relating tothe condensed consolidated statements of cash flows for the three months ended March 31,2009 and 2008 is presented in the following table:

 
| **(In thousands)**                                        | ** ** | **Three months ended****March 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **Cash paid for or (received from):** | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| Interest expense                                               |       | $                                                  | 127,710    |   | $ | 90,149 |   |
| Interest and dividend income                                   |       | (2,368                                             | )          | (3,841 | ) |
| Income taxes, net of refunds                                   |       | (864                                               | )          | 775 |   |
|                                                                |            |                                                    |            |  |  |  |  |

 

**Note 8.Comprehensive Income**

 

 Total comprehensive income (loss) was $0.1million and ($14.7) million for the three months ended March 31, 2009 and2008, respectively. Total comprehensive loss primarily includes net income(loss), unrealized gain (loss) on marketable securities, unrealized gain (loss)on derivative instruments and the effect of foreign currency translation.

 

**Note 9. Receivable Sales**

 

The Company hasentered into an accounts receivable securitization arrangement under whichTruGreen LawnCare and Terminix sell certain eligible trade accounts receivableto ServiceMaster Funding Company LLC (“Funding”), the Company’swholly-owned, bankruptcy-remote subsidiary which is consolidated for financialreporting purposes. Funding, in turn, may transfer, on a revolving basis, anundivided percentage ownership interest of up to $50 million in the poolof 

 

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accounts receivable toone or both of the unrelated purchasers who are parties to the accountsreceivable securitization arrangement (“Purchasers”). The amount of theeligible receivables varies during the year based on seasonality of thebusiness and could, at times, limit the amount available to the Company fromthe sale of these interests.

 

The accounts receivablesecuritization arrangement is a 364-day facility that is renewable annually atthe option of Funding, with a final termination date of July 17, 2012.Only one of the Purchasers is required to purchase interests under thearrangement. If this Purchaser were to exercise its right to terminate itsparticipation in the arrangement, which it may do in the third quarter of eachyear, the amount of cash available to the Company may be reduced or eliminated.

 

During the first quarterof 2009 and 2008, there were no transfers of interests in the pool of accountsreceivables to Purchasers under this arrangement. As of March 31, 2009,the Company had $10.0 million outstanding under the arrangement and had$23.4 million of remaining capacity available under the accountsreceivable securitization arrangement. As of March 31, 2008, there were noamounts outstanding under the arrangement.

 

The Company has recordedits obligation to repay the third party for its interest in the pool ofreceivables as long-term debt in these condensed consolidated financialstatements. The interest rates applicable to the Company’s obligation are basedon a fluctuating rate of interest measured based on the third party purchaser’spooled commercial paper rate, as defined (0.53% at March 31, 2009). Inaddition, the Company pays usage fees on its obligations and commitment fees onundrawn amounts committed by the Purchasers. All obligations under the accountsreceivable securitization arrangement must be repaid by July 17, 2012, thefinal termination date of the arrangement.

 

**Note 10. Cash and MarketableSecurities**

 

Cash, money market fundsand certificates of deposits, with maturities of three months or less, areincluded in the condensed consolidated statements of financial position caption“Cash and cash equivalents.” As of March 31, 2009 and December 31,2008, the Company’s investments consist primarily of domestic publicly tradeddebt of $86.2 million and $90.1 million, respectively and commonequity securities of $36.7 million and $43.0 million, respectively.

 

The aggregate marketvalue of the Company’s short-term and long-term investments in debt and equitysecurities was $122.9 million and $133.1 million, and the aggregatecost basis was $124.3 million and $134.9 million at March 31,2009 and December 31, 2008, respectively.

 

Gains and losses on salesof investments, as determined on a specific identification basis, are includedin investment income in the period they are realized. The Company periodicallyreviews its portfolio of investments to determine whether there has been another than temporary decline in the value of the investments from factors suchas deterioration in the financial condition of the issuer or the market(s) inwhich it competes. The Company recorded an impairment charge of approximately$5.4 million ($3.0 million after-tax) and $5.2 million($3.7 million after-tax) during the three months ended March 31, 2009and 2008, respectively, due to other than temporary declines in the value ofcertain investments. The unrealized gains in the investment portfolio wereapproximately $3.6 million and $4.2 million as of March 31, 2009and December 31, 2008, respectively. Unrealized losses were approximately$5.0 million and $6.0 million as of March 31, 2009 and December 31,2008, respectively. The portion of unrealized losses which have been in a lossposition for more than one year at March 31, 2009 and December 31,2008 was approximately $0.5 million and $0.4 million, respectively. Theaggregate fair value of the investments with unrealized losses totaled$24.3 million and $26.8 million at March 31, 2009 and December 31,2008, respectively.

 

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**Note 11. Long-Term Debt**

 

Long-term debt at March 31,2009 and December 31, 2008 is summarized in the following table:

 
| **(In thousands)**                                 | ** ** | **As of  March 31,  2009** | ** ** | **As of  December 31,  2008** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| Senior secured term loan facility maturing in 2014      |       | $                                    | 2,603,625  |                                    | $          | 2,610,250 |   |
| 10.75% /11.50% senior toggle notes maturing in 2015 (1) |       | 1,061,000                            |       | 1,150,000                               |       |
| Revolving credit facility maturing in 2013              |       | 165,000                              |       | 165,000                                 |       |
| 7.10% notes maturing in 2018 (2)                        |       | 62,180                               |       | 61,698                                  |       |
| 7.45% notes maturing in 2027 (2)                        |       | 145,883                              |       | 145,215                                 |       |
| 7.25% notes maturing in 2038 (2)                        |       | 59,218                               |       | 59,016                                  |       |
| Other                                                   |       | 69,567                               |       | 74,913                                  |       |
| Less current portion                                    |       | (220,812                             | )          | (221,269                                | )          |
| Total long-term debt                                    |       | $                                    | 3,945,661  |                                    | $          | 4,044,823 |   |

 

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(1)           During the first quarter of 2009, theCompany completed open market purchases of $89.0 million in face value ofour Permanent Notes for a cost of $41.0 million. The debt acquired by theCompany has been retired, and the Company has discontinued the payment ofinterest. The Company recorded a gain on extinguishment of debt of$46.1 million in its condensed consolidated statement of operations forthe first quarter of 2009 related to these retirements. Included in the gain onextinguishment of debt are write-offs of unamortized debt issuance costsrelated to the extinguished debt of $1.9 million.

 

(2)           The increase in the balance fromDecember 31, 2008 to March 31, 2009 reflects the amortization of fairvalue adjustments related to purchase accounting, which effectively increasesthe stated coupon interest rates.

** **

**Note 12. Discontinued Operations**

 

Reported “loss fromdiscontinued operations, net of income taxes” for all periods presentedincludes the operating results of the sold and discontinued businesses noted inthe Company’s Annual Report on Form 10-K for the year ended December 31,2008.

 

The operating results andfinancial position of discontinued operations are as follows:

 
| ** **                                             | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                                | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Operating Results:                                     |       |                                             |       |   |   |
| Operating revenue                                      |       | $                                                | —     |   | $ | 17,806 |   |
| Operating loss                                         |       | (264                                             | )          | (1,137 | ) |
| Interest expense                                       |       | —                                           |       | (41 | ) |
| Loss from discontinued operations, before income taxes |       | (264                                             | )          | (1,178 | ) |
| Benefit for income taxes                               |       | (101                                             | )          | (430 | ) |
| Loss from discontinued operations, net of income taxes |       | $                                                | (163       | ) | $ | (748 | ) |

 
| ** **            | ** ** | **As of   March 31,  2009** | ** ** | **As of  December 31,  2008** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|
| Financial Position:   |       |                                       |       |                                    |       |
| Current assets        |       | $                                          | 177        |                                    | $          | 412 |   |
| Total assets          |       | $                                          | 177        |                                    | $          | 412 |   |
| Current liabilities   |       | $                                          | 2,963      |                                    | $          | 4,870 |   |
| Long-term liabilities |       | 4,126                                      |       | 4,077                                   |       |
| Total liabilities     |       | $                                          | 7,089      |                                    | $          | 8,947 |   |

 

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The table belowsummarizes the activity for the three months ended March 31, 2009 for theremaining liabilities from operations that were disposed of in years prior to2009. The remaining obligations primarily relate to long-term self-insuranceclaims. The Company believes that the remaining reserves continue to beadequate and reasonable.

 
| **(In thousands)**                           | ** ** | **Balance at  December 31,  2008** | ** ** | **Cash Payments  or Other** | ** ** | **(Income)/  Expense** | ** ** | **Balance at  March 31,  2009** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------------------------|------------|
| Remaining liabilities of discontinued operations: |       |                                         |       |                                  |       |                   |       |                                      |       |
| ARS/AMS                                           |       | $                                            | 2,331      |                                  | $          | —                 |       | $                                         | —     |   | $ | 2,331 |   |
| LandCare Construction                             |       | 869                                          |       | (37                                   | )          | (59                    | )          | 773                                       |       |
| LandCare utility line clearing business           |       | 1,099                                        |       | (35                                   | )          | —                 |       | 1,064                                     |       |
| Certified Systems, Inc. and other            |       | 3,558                                        |       | (1,154                                | )          | —                 |       | 2,404                                     |       |
| InStar                                            |       | 1,090                                        |       | (573                                  | )          | —                 |       | 517                                       |       |
|                                              |       | $                                            | 8,947      |                                  | $          | (1,799                 | )          | $                                         | (59        | ) | $ | 7,089 |   |

 

**Note 13. Income Taxes**

 

At December 31,2008, the Company had $14.2 million of tax benefits primarily reflected instate tax returns that had not been recognized for financial reporting purposes(“unrecognized tax benefits”). During the first quarter of 2009 unrecognizedtax benefits decreased by $3.5 million and accrued estimated interest and taxpenalties decreased by $0.7 million. The Company currently estimates that, as aresult of pending tax settlements and expiration of statutes of limitations,the amount of unrecognized tax benefits could be reduced by approximately $2.3million during the next 12 months.

 

In the first quarter of2009, the IRS completed the audit of the Company’s tax return for the yearended December 31, 2007 with no adjustments or additional payments.

 

***Note14. Business Segment Reporting***

* *

*Thebusiness of the Company is conducted through five reportablesegments: TruGreen LawnCare, TruGreen LandCare, Terminix, American HomeShield and Other Operations and Headquarters.*

* *

*Inaccordance with SFAS 131, “Disclosures about Segments of an Enterprise andRelated Information”, the Company’s reportable segments are strategic businessunits that offer different services.*TheTruGreen LawnCare segment provides residential and commercial lawn careservices. The TruGreen LandCare segment provides landscaping services primarilyto commercial customers. The Terminix segment provides termite and pest controlservices to residential and commercial customers. The American Home Shieldsegment provides home warranties to consumers that cover HVAC, plumbing andother home systems and appliances. The Other Operations and Headquarterssegment includes the franchised and Company-owned operations of ServiceMasterClean, AmeriSpec, Furniture Medic and Merry Maids, which provide primarilyresidential disaster restoration, commercial cleaning, carpet and upholsterycleaning, home inspection services, furniture repair and house cleaningservices. The Other Operations and Headquarters segment also includes theCompany’s headquarters operations, which provide various technology, marketing,finance, legal and other support services to the business units.

 

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* *

*Segmentinformation for continuing operations is presented below.*

 
| ** **                           | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**              | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Operating Revenue:                   |       |                                             |       |   |   |
| TruGreen LawnCare                    |       | $                                                | 134,666    |   | $ | 134,442 |   |
| TruGreen LandCare                    |       | 66,885                                           |       | 78,652 |   |
| Terminix                             |       | 263,161                                          |       | 261,648 |   |
| American Home Shield                 |       | 130,868                                          |       | 105,418 |   |
| Other Operations and Headquarters    |       | 50,347                                           |       | 52,071 |   |
| Total Operating Revenue              |       | $                                                | 645,927    |   | $ | 632,231 |   |
| Operating (Loss) Income:(1),(2)      |       |                                             |       |   |   |
| TruGreen LawnCare                    |       | (19,387                                          | )          | (34,059 | ) |
| TruGreen LandCare                    |       | 5,696                                            |       | 2,091 |   |
| Terminix                             |       | 46,491                                           |       | 43,213 |   |
| American Home Shield                 |       | 5,454                                            |       | (17,692 | ) |
| Other Operations and Headquarters(2) |       | (9,576                                           | )          | (3,855 | ) |
| Total Operating Income (Loss)        |       | $                                                | 28,678     |   | $ | (10,302 | ) |

 

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(1)           Presented below is a reconciliation oftotal segment operating income (loss) to loss from continuing operations beforeincome taxes.

 
| ** **                                          | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                             | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Total Segment Operating Income (Loss)               |       | $                                                | 28,678     |   | $ | (10,302 | ) |
| Non-operating expense (income):                     |       |                                             |       |   |   |
| Interest expense                                    |       | 76,666                                           |       | 89,586 |   |
| Interest and net investment loss                    |       | 4,761                                            |       | 6,045 |   |
| Gain on extinguishment of debt                      |       | (46,106                                          | )          | — |   |
| Other expense                                       |       | 200                                              |       | 132 |   |
| Loss from Continuing Operations before Income Taxes |       | $                                                | (6,843     | ) | $ | (106,065 | ) |

 

(2)           The results include restructuring chargesrelated to (i) Fast Forward, (ii) a branch optimization project atTerminix and (iii) the Company’s decision to consolidate its corporateheadquarters into its operations support center in Memphis, Tennessee and closeits former headquarters in Downers Grove, Illinois. The restructuring chargestotaled $8.5 million and $3.3 million for the three months ended March 31,2009 and 2008, respectively.

 
| ** **                        | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**           | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Restructuring charges:            |       |                                             |       |   |   |
| TruGreen LawnCare                 |       | $                                                | —     |   | $ | 281 |   |
| TruGreen LandCare                 |       | (30                                              | )          | (421 | ) |
| Terminix                          |       | 3,219                                            |       | 57 |   |
| American Home Shield              |       | 39                                               |       | — |   |
| Other Operations and Headquarters |       | 5,255                                            |       | 3,408 |   |
| Total Restructuring charges       |       | $                                                | 8,483      |   | $ | 3,325 |   |

 

The results alsoinclude Merger charges related to the purchase of ServiceMaster by a group ofinvestors led by CD&R. The Merger related charges totaled $0.3 millionand $0.1 million for the three months ended March 31, 2009 and 2008,respectively. All Merger related charges are included in the Other Operationsand Headquarters segment.

 

**Note 15. Related PartyTransactions**

 

In connection with theTransactions, the Company entered into a consulting agreement with CD&Runder which CD&R provides the Company with on-going consulting andmanagement advisory services in exchange for an annual management fee of $2million. This fee is payable quarterly. The Company recorded a management feeof $0.5 million and $0.5 million for thethree months ended March 31, 2009 and 2008, respectively. The consultingagreement also provides that 

 

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CD&Rmay receive additional fees in connection with certain subsequent financing andacquisition or disposition transactions.

 

The Company wasadvised by Holdings that, during the first quarter of 2009, Holdings completedopen market purchases of $11.0 million in face value of our Permanent Notes fora cost of $4.5 million. As of March 31, 2009, Holdings has completedopen market purchases totaling $65.0 million in face value of ourPermanent Notes for a cost of $21.4 million. The debt acquired by Holdingshas not been retired, and the Company has continued to pay interest inaccordance with the terms of the debt. During the first quarter of 2009, theCompany recorded interest expense of $1.7 million and made cash payments toHoldings of $3.0 million. Interest accrued by the Company and payable toHoldings as of March 31, 2009 amounted to $1.4 million.

 

**Note 16.Newly Issued Accounting Statements and Positions**

 

In September 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS 157, “Fair Value Measurement”. ThisStatement defines fair value, establishes a framework for measuring fair valuein accordance with GAAP, and expands disclosures about fair value measurements.SFAS No. 157 does not require any new fair value measurements. In February 2008,the FASB approved FASB Staff Position FAS 157-2, “Effective Date of FASBStatement No. 157” (“FSP 157-2”), that permits companies to partiallydefer the effective date of SFAS No. 157 for one year for non-financialassets and non-financial liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis. FSP 157-2 does notpermit companies to defer recognition and disclosure requirements for financialassets and financial liabilities or for non-financial assets and non-financialliabilities that are re-measured at least annually. SFAS No. 157 thereforeis effective for financial assets and financial liabilities and fornon-financial assets and non-financial liabilities that are re-measured atleast annually for fiscal years beginning after November 15, 2007. It iseffective for non-financial assets and non-financial liabilities that arerecognized or disclosed at fair value in the financial statements on anonrecurring basis for fiscal years beginning after November 15, 2008. In October 2008,the FASB approved FASB Staff Position FAS 157-3, “Determining the Fair Value ofa Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”),which clarified the application of SFAS No. 157 in cases where the marketfor the asset is not active. FSP 157-3 was effective upon issuance. The Companyconsidered the guidance provided by FSP 157-3 in the preparation of theaccompanying condensed consolidated financial statements. The Company hasassessed the impact of this Statement to the Company’s condensed consolidatedfinancial position, results of operations and cash flows. The Company adoptedthis Statement for financial assets and liabilities in 2008 and fornon-financial assets and liabilities in the first quarter of 2009. The adoptionof this Statement for non-financial assets and liabilities recognized at fairvalue on a nonrecurring basis did not have a material effect on these condensedconsolidated financial statements.  In April 2009,the FASB issued FASB Staff Position FAS 157-4, “Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly”(“FSP 157-4”),which provides additional guidance for estimating fair value in accordance withSFAS No. 157, when the volume and level of activity for the asset orliability have significantly decreased and also includes guidance onidentifying circumstances that indicate a transaction is not orderly.  FSP 157-4 shall be effective for interim andannual reporting periods ending after June 15, 2009, and shall be appliedprospectively.  The Company is currentlyevaluating the effects of this standard.

 

 In December 2007, the FASB issued SFAS 141(R),“Business Combinations”. This Statement will significantly change theaccounting for business combinations and is effective for business combinationsfinalized in fiscal years beginning after December 15, 2008. SFAS No. 141(R)changes the method for applying the accounting for business combinations in anumber of significant respects including the requirement to expense transactionfees and expected restructuring costs as incurred, rather than including theseamounts in the allocated purchase price; the requirement to recognize the fairvalue of contingent consideration at the acquisition date, rather than theexpected amount when the contingency is resolved; the requirement to recognizethe fair value of acquired in-process research and development assets at theacquisition date, rather than immediately expensing; and the requirement torecognize a gain in relation to a bargain purchase price, rather than reducingthe allocated basis of long-lived assets. In addition, SFAS No. 141(R)requires that changes in the amount of acquired tax attributes be included inthe Company’s results of operations, rather than adjusting the allocatedpurchase price. SFAS No. 141(R) was effective on January 1, 2009 andis being applied prospectively to business combinations that have anacquisition date on or after January 1, 2009. While SFAS No. 141(R)applies only to business combinations with an acquisition date after itseffective date, the amendments to SFAS No. 109, “Accounting for IncomeTaxes,” with respect to deferred tax asset valuation allowances and liabilitiesfor income tax uncertainties, will be applied to all deferred tax valuationallowances and liabilities for income tax uncertainties recognized in priorbusiness combinations. In April 2009, the FASB issued FASB Staff PositionFAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in aBusiness Combination That Arise from Contingencies” (“FSP141(R)-1”), whichamends and clarifies SFAS No. 141(R) to address application on initialrecognition and measurement, subsequent measurement and accounting, anddisclosure of assets and liabilities arising from contingencies in a businesscombination.  The provisions of SFAS No. 141(R)and FSP 141 

 

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(R)-1 will notimpact the Company’s condensed consolidated financial statements for priorperiods. The Company adopted SFAS No. 141(R) and FSP 141(R)-1 during thefirst quarter of 2009. The Company’s adoption of these standards did not have amaterial affect on the Company’s condensed consolidated financial statements.

 

 In December 2007, the FASB issued SFAS160, “Non-controlling Interests in Consolidated Financial Statements—AnAmendment of ARB No. 51”. This Statement establishes new accounting andreporting standards for the non-controlling interest in a subsidiary and forthe deconsolidation of a subsidiary. This Statement is effective for fiscalyears beginning after December 15, 2008, with presentation and disclosurerequirements applied retrospectively to comparative financial statements. TheCompany adopted the provisions of this standard in the first quarter of 2009.The adoption of this standard did not have a material effect on these condensedconsolidated financial statements.

 

 In March 2008, the FASB issued SFAS 161, “Disclosuresabout Derivative Instruments and Hedging Activities—an amendment of FASBStatement No. 133”. This statement requires additional disclosures forderivative instruments and hedging activities that include how and why anentity uses derivatives, how these instruments and the related hedged items areaccounted for under SFAS No. 133 and related interpretations, and howderivative instruments and related hedged items affect the entity’s financialposition, results of operations and cash flows. This statement is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008. The Company adopted this standard in the firstquarter of 2009 (See Note 17).

 

 In April 2008, the FASB approved FASBStaff Position FAS 142-3, “Determination of the Useful Life of IntangibleAssets” (“FSP 142-3”). FSP 142-3 amends the factors that should be consideredin developing renewal or extension assumptions used to determine the usefullife of a recognized intangible asset under SFAS No. 142, “Goodwill andOther Intangible Assets.” FSP 142-3 is effective for financial statements issuedfor fiscal years beginning after November 15, 2008. The Company adoptedFSP 142-3 in the first quarter of 2009. The adoption of this standard did not have a material effect on thesecondensed consolidated financial statements.

 

In April 2009, theFASB issued FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments” (“FSP 115-2”), which changesexisting guidance for determining whether an impairment of debt securities isother than temporary. FSP 115-2 requires other than temporary impairments to beseparated into the amount representing the decrease in cash flows expected tobe collected from a security (referred to as credit losses) which is recognizedin earnings and the amount related to other factors which is recognized inother comprehensive income. This noncredit loss component of the impairment mayonly be classified in other comprehensive income if the holder of the securityconcludes that it does not intend to sell and it is more likely than not thatit will not be required to sell the security before it recovers its value. Ifthese conditions are not met, the noncredit loss must also be recognized inearnings. When adopting FSP 115-2, an entity is required to record a cumulativeeffect adjustment as of the beginning of the period of adoption to reclassifythe noncredit component of a previously recognized other than temporaryimpairment from retained earnings to accumulated other comprehensive income.FSP 115-2 is effective for interim and annual periods ending after June 15,2009. The Company is currently evaluating the effects of FSP 115-2 and has notyet determined the impact on the Company’s condensed consolidated financialstatements.

 

**Note 17.Fair Value of Financial Instruments**

 

The Company usesderivative financial instruments to manage risks associated with changes infuel prices and interest rates. The Company does not hold or issue derivativefinancial instruments for trading or speculative purposes. In designating itsderivative financial instruments as hedging instruments under Statement ofFinancial Accounting Standards (SFAS) No. 133, *Accounting for Derivative Instruments*, the Company formallydocuments the relationship between the hedging instrument and the hedged item,as well as the risk management objective and strategy for the use of thehedging instrument. This documentation includes linking the derivatives toforecasted transactions. The Company assesses at the time a derivative contractis entered into, and at least quarterly thereafter, whether the derivative itemis effective in offsetting the projected changes in cash flows of theassociated forecasted transactions. All of the Company’s designated hedginginstruments are classified as cash flow hedges.

 

The Company has historicallyhedged a significant portion of its annual fuel consumption of approximately 28million gallons. The Company has also hedged the interest payments on a portionof its variable rate debt through the use of interest rate swap agreements. Inaccordance with SFAS No. 133, all of the Company’s fuel hedges andinterest rate swap agreements are classified as cash flow hedges, and, as such,the hedging instruments are recorded on the balance sheet as either an asset orliability at fair value, with the effective portion of changes in the fairvalue attributable to the hedged risks recorded in other comprehensive income.Any change in the fair value of the hedging instrument resulting from 

 

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ineffectiveness, asdefined by SFAS No. 133 is recognized in current period earnings. Cashflows related to fuel and interest rate derivatives are classified as operatingactivities in the condensed consolidated statements of cash flows.

 

 The Company has estimated the fair value of itsfinancial instruments measured at fair value on a recurring basis using themarket and income approaches. For investments in marketable securities,deferred compensation trust assets and derivative contracts, which are carriedat their fair values, the Company’s fair value estimates incorporate quotedmarket prices, other observable inputs (for example, interest rates) andunobservable inputs (for example, forward commodity prices) at the balancesheet date.

 

 The carrying amount and estimated fair value ofcertain of the Company’s financial instruments for the periods presented are asfollows:

 
| ** **                            | ** ** | ** **                                                 | ** ** | **As of  March 31, 2009** | ** ** | **As of  December 31, 2008**          | ** ** |
|---------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                            | ** ** | ** **                                                 | ** ** | ** **                               | ** ** | **Estimated Fair Value Measurements** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                                                 | ** ** | ** **                               | ** ** | **Quoted**                                           | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                                                 | ** ** | ** **                               | ** ** | **Prices In**                                   | ** ** | **Other** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                                                 | ** ** | ** **                               | ** ** | **Active**                                           | ** ** | **Observable** | ** ** | **Unobservable** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                                                 | ** ** | **Carrying**                             | ** ** | **Markets**                                          | ** ** | **Inputs** | ** ** | **Inputs** | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| **(In thousands)**               | ** ** | **Balance Sheet Locations**                      | ** ** | **Value**                                | ** ** | **(Level 1)**                                   | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** | **Value** | ** ** | **Fair Value** | ** ** |
| Financial Assets:                     |       |                                                       |       |                                     |       |                                                 |       |   |   |   |   |   |   |   |   |
| Deferred  compensation trust assets   |       | Long-term marketable securities                            |       | $                                        | 9,098      |                                                 | $          | 9,098 |   | $ | — |   | $ | — |   | $ | 9,901 |   | $ | 9,901 |   |
| Investments in  marketable securities |       | Marketable securities and long-term marketable  securities |       | 113,757                                  |       | 43,930                                               |       | 69,827 |   | — |   | 123,161 |   | 123,161 |   |
| Fuel swap  contracts:                 |       |                                                       |       |                                     |       |                                                 |       |   |   |   |   |   |   |   |   |
| Current                               |       | Prepaid expenses and other assets                          |       | 140                                      |       | —                                               |       | — |   | 140 |   | — |   | — |   |
| Noncurrent                            |       | Other assets                                               |       | 1,193                                    |       | —                                               |       | — |   | 1,193 |   | — |   | — |   |
| Total financial  assets               |       |                                                       |       | $                                        | 124,188    |                                                 | $          | 53,028 |   | $ | 69,827 |   | $ | 1,333 |   | $ | 133,062 |   | $ | 133,062 |   |
|                                  |       |                                                       |       |                                     |       |                                                 |       |   |   |   |   |   |   |   |   |
| Financial  Liabilities:               |       |                                                       |       |                                     |       |                                                 |       |   |   |   |   |   |   |   |   |
| Fuel swap  contracts                  |       |                                                       |       |                                     |       |                                                 |       |   |   |   |   |   |   |   |   |
| Current                               |       | Other accrued liabilities                                  |       | $                                        | 21,087     |                                                 | $          | — |   | $ | — |   | $ | 21,087 |   | $ | 23,607 |   | $ | 23,607 |   |
| Noncurrent                            |       | Other long-term obligations                                |       | 1,492                                    |       | —                                               |       | — |   | 1,492 |   | 1,317 |   | 1,317 |   |
| Interest rate  swap contracts         |       | Other long-term obligations                                |       | 63,474                                   |       | —                                               |       | 63,474 |   | — |   | 59,852 |   | 59,852 |   |
| Total financial  liabilities          |       |                                                       |       | $                                        | 86,053     |                                                 | $          | — |   | $ | 63,474 |   | $ | 22,579 |   | $ | 84,776 |   | $ | 84,776 |   |

 

A reconciliation of thebeginning and ending fair values of financial instruments valued usingsignificant unobservable inputs (Level 3) is presented as follows:

 
| **(In thousands)**                        | ** ** | **Fuel Swap  Contract  Assets (Liabilities)** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------|------------|
| Balance at December 31, 2008              |       | $                                                       | (24,924    | ) |
| Total gains (losses) (realized and unrealized) |       |                                                    |       |
| Included in earnings(1)                        |       | (6,577                                                  | )          |
| Included in other comprehensive loss           |       | 3,678                                                   |       |
| Settlements, net                               |       | 6,577                                                   |       |
| Balance at March 31, 2009                 |       | $                                                       | (21,246    | ) |

 

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(1)                                  Gains included in earnings are reportedin cost of services rendered and products sold. The effect of derivativeinstruments on the condensed consolidated statement of operations and othercomprehensive income for the quarter ended March 31, 2009 is as follows:

 

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| ** **                                                                                        | ** ** | **Three months ended March 31, 2009**                                   | ** ** | ** **                                                                                       | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| **Derivatives in SFAS No. 133  Cash Flow Hedge Relationships** | ** ** | **Effective Portion of  Gain Recognized in  Other Comprehensive  Loss** | ** ** | **Effective Portion of  Loss Reclassified from  AOCI into Income** | ** ** | **Location of Gain (Loss)  included in Income** | ** ** |
| Fuel swap contracts                                                                               |       | $                                                                                                | 3,678      |                                                                                             | $          | (6,577 | ) | Cost of services rendered and products sold |   |
| Interest rate swap contracts                                                                      |       | $                                                                                                | 3,622      |                                                                                             | $          | (11,044 | ) | Interest expense |   |

 

Ineffective portions ofderivative instruments designated in SFAS No. 133 cash flow hedgerelationships were insignificant during the first quarter of 2009. As of March 31,2009, the Company had fuel swap contracts to pay fixed prices for fuel with anaggregate notional amount of $121.6 million, maturing through 2010. Under the termsof its fuel swap contracts, the Company is required to post collateral in theevent that the fair value of the contracts exceeds a certain agreed uponliability level. As of March 31, 2009, the Company posted approximately$23.5 million in letters of credit as collateral for these contracts,$5.0 million of which were posted under the Company’s Revolving CreditFacility. As of March 31,2009, the Company had interest rate swap contracts to pay fixed rates forinterest on long-term debt with an aggregate notional amount of $1.430 billion,maturing through 2012. The Company also entered into an additional swapagreement in April 2009 (see Note 18).

 

**Note 18.Subsequent Events**

 

In April 2009,the Company entered into a 2-year interest rate swap agreement effective August 2,2010 with a notional amount of $530 million. Under the terms of theagreement, the Company will pay a fixed rate of interest of 2.55% on thenotional amount of the agreement.  TheCompany will receive a floating rate of interest (based on one month LIBOR) onthe notional amount.  Therefore, duringthe term of the swap agreement, the effective interest rate for $530 million ofthe term loans will be fixed at a rate of 2.55% plus the incremental borrowingmargin described in Note 14 in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008. In accordance with SFAS No. 133, this interest rate swap agreementis classified as a cash flow hedge and, as such, the hedging instrument will berecorded on the balance sheet as either an asset or liability at fair value,with the effective portion of the changes in fair value attributable to thehedged risks recorded in other comprehensive income.

 

**Note 19.Condensed Consolidating Financial Statements of The ServiceMaster Company andSubsidiaries**

 

Thefollowing condensed consolidating financial statements of the Company and itssubsidiaries have been prepared pursuant to Rule 3-10 of Regulation S-X.These condensed consolidating financial statements have been prepared from theCompany’s financial information on the same basis of accounting as thecondensed consolidated financial statements. Goodwill and other intangibleassets have been allocated to all of the subsidiaries of the Company based onmanagement’s estimates.

 

On July 24,2008, outstanding amounts under the Interim Loan Facility converted into thePermanent Notes. The payment obligations of the Company under the PermanentNotes are jointly and severally guaranteed on a senior unsecured basis bycertain of the Company’s domestic subsidiaries excluding certain subsidiariessubject to regulatory requirements in various states (“Guarantors”). Each ofthe Guarantors is wholly-owned, directly or indirectly, by the Company, and allguarantees are full and unconditional. All other subsidiaries of the Company,either directly or indirectly owned, do not guarantee the Permanent Notes (“Non-Guarantors”).

 

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**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed Consolidating Statement ofOperations**

**For theThree Months Ended March 31, 2009**

**(inthousands)**

 
| ** **                                                        | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                             |       | $                 | —     |           | $          | 506,936        |       | $                | 156,284    |             | $          | (17,293 | ) | $ | 645,927 |   |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                       |       | —            |       | 342,774        |       | 68,919         |       | (17,293          | )          | 394,400          |       |
| Selling and administrative expenses                               |       | 998               |       | 99,157         |       | 73,608         |       | —           |       | 173,763          |       |
| Amortization expense                                              |       | 55                |       | 31,248         |       | 9,006          |       | —           |       | 40,309           |       |
| Merger related charges                                            |       | 294               |       | —         |       | —         |       | —           |       | 294              |       |
| Restructuring charges                                             |       | —            |       | 3,190          |       | 5,293          |       | —           |       | 8,483            |       |
| Total operating costs and expenses                                |       | 1,347             |       | 476,369        |       | 156,826        |       | (17,293          | )          | 617,249          |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                       |       | (1,347            | )          | 30,567         |       | (542           | )          | —           |       | 28,678           |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                         |       | 76,859            |       | 3,201          |       | (3,394         | )          | —           |       | 76,666           |       |
| Interest and net investment loss                                  |       | 1,484             |       | 2,075          |       | 1,202          |       | —           |       | 4,761            |       |
| Gain on extinguishment of debt                                    |       | (46,106           | )          | —         |       | —         |       | —           |       | (46,106          | )          |
| Other expense, net                                                |       | —            |       | —         |       | 200            |       | —           |       | 200              |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations before  Income Taxes** |       | (33,584           | )          | 25,291         |       | 1,450          |       | —           |       | (6,843           | )          |
| (Benefit) provision for income taxes                              |       | (23,206           | )          | 15,009         |       | 642            |       | —           |       | (7,555           | )          |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                      |       | (10,378           | )          | 10,282         |       | 808            |       | —           |       | 712              |       |
| Loss from discontinued operations, net of income taxes            |       | —            |       | —         |       | (163           | )          | —           |       | (163             | )          |
| Equity in earnings (losses) of subsidiaries (net of tax)          |       | 10,927            |       | 1,399          |       | —         |       | (12,326          | )          | —           |       |
| **Net Income (Loss)**                                             |       | $                 | 549        |           | $          | 11,681         |       | $                | 645        |             | $          | (12,326 | ) | $ | 549 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**For theThree Months Ended March 31, 2008**

**(inthousands)**

 
| ** **                                                        | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                             |       | $                 | —     |           | $          | 517,048        |       | $                | 131,606    |             | $          | (16,423 | ) | $ | 632,231 |   |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                       |       | —            |       | 367,732        |       | 66,059         |       | (16,423          | )          | 417,368          |       |
| Selling and administrative expenses                               |       | 1,708             |       | 101,429        |       | 67,979         |       | —           |       | 171,116          |       |
| Amortization expense                                              |       | 55                |       | 39,072         |       | 11,547         |       | —           |       | 50,674           |       |
| Merger related charges                                            |       | 50                |       | —         |       | —         |       | —           |       | 50               |       |
| Restructuring charges                                             |       | —            |       | 86             |       | 3,239          |       | —           |       | 3,325            |       |
| Total operating costs and expenses                                |       | 1,813             |       | 508,319        |       | 148,824        |       | (16,423          | )          | 642,533          |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                       |       | (1,813            | )          | 8,729          |       | (17,218        | )          | —           |       | (10,302          | )          |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                         |       | 87,708            |       | 2,268          |       | (390           | )          | —           |       | 89,586           |       |
| Interest and net investment loss                                  |       | 2,885             |       | 648            |       | 2,512          |       | —           |       | 6,045            |       |
| Other expense, net                                                |       | —            |       | —         |       | 132            |       | —           |       | 132              |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations before  Income Taxes** |       | (92,406           | )          | 5,813          |       | (19,472        | )          | —           |       | (106,065         | )          |
| (Benefit) provision for income taxes                              |       | (27,875           | )          | (5,542         | )          | 2,446          |       | —           |       | (30,971          | )          |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                      |       | (64,531           | )          | 11,355         |       | (21,918        | )          | —           |       | (75,094          | )          |
| Loss from discontinued operations, net of income taxes            |       | —            |       | —         |       | (748           | )          | —           |       | (748             | )          |
| Equity in losses of subsidiaries (net of tax)                     |       | (11,311           | )          | (21,417        | )          | —         |       | 32,728           |       | —           |       |
| **Net Loss**                                                      |       | $                 | (75,842    | )              | $          | (10,062        | )          | $                | (22,666    | )                | $          | 32,728 |   | $ | (75,842 | ) |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Financial Position**

**As ofMarch 31, 2009**

**(inthousands)**

 
| ** **                                                                   | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                   | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Current Assets:**                                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash and cash equivalents                                                    |       | $                 | 167,240    |           | $          | 17,627         |       | $                | 103,449    |             | $          | — |   | $ | 288,316 |   |
| Marketable securities                                                        |       | —            |       | —         |       | 19,285         |       | —           |       | 19,285           |       |
| Receivables                                                                  |       | 1,067             |       | 144,147        |       | 345,770        |       | (159,207         | )          | 331,777          |       |
| Inventories                                                                  |       | —            |       | 83,621         |       | 2,504          |       | —           |       | 86,125           |       |
| Prepaid expenses and other assets                                            |       | 9,442             |       | 67,562         |       | 18,884         |       | —           |       | 95,888           |       |
| Deferred customer acquisition costs                                          |       | —            |       | 36,582         |       | 21,648         |       | —           |       | 58,230           |       |
| Deferred taxes                                                               |       | 9,786             |       | 27,123         |       | 5,268          |       | —           |       | 42,177           |       |
| Assets of discontinued operations                                            |       | —            |       | —         |       | 177            |       | —           |       | 177              |       |
| Total Current Assets                                                         |       | 187,535           |       | 376,662        |       | 516,985        |       | (159,207         | )          | 921,975          |       |
| **Property and Equipment:**                                                  |       |              |       |           |       |           |       |             |       |             |       |
| At cost                                                                      |       | —            |       | 230,237        |       | 77,165         |       | —           |       | 307,402          |       |
| Less: accumulated depreciation                                               |       | —            |       | (61,858        | )          | (25,178        | )          | —           |       | (87,036          | )          |
| Net property and equipment                                                   |       | —            |       | 168,379        |       | 51,987         |       | —           |       | 220,366          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Assets:**                                                            |       |              |       |           |       |           |       |             |       |             |       |
| Goodwill                                                                     |       | —            |       | 2,733,494      |       | 361,592        |       | —           |       | 3,095,086        |       |
| Intangible assets, primarily trade names, service marks and  trademarks, net |       | —            |       | 2,103,347      |       | 825,717        |       | —           |       | 2,929,064        |       |
| Notes receivable                                                             |       | 308,458           |       | 741            |       | 44,628         |       | (329,394         | )          | 24,433           |       |
| Long-term marketable securities                                              |       | 9,098             |       | —         |       | 94,472         |       | —           |       | 103,570          |       |
| Investments in and advances to subsidiaries                                  |       | 5,518,138         |       | 1,605,607      |       | 82,322         |       | (7,206,067       | )          | —           |       |
| Other assets                                                                 |       | 100,007           |       | 901            |       | 6,244          |       | (71,987          | )          | 35,165           |       |
| Debt issuance costs                                                          |       | 77,453            |       | —         |       | —         |       | —           |       | 77,453           |       |
| Total Assets                                                                 |       | $                 | 6,200,689  |           | $          | 6,989,131      |       | $                | 1,983,947  |             | $          | (7,766,655 | ) | $ | 7,407,112 |   |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Liabilities and Shareholder’s Equity**                                |       |              |       |           |       |           |       |             |       |             |       |
| **Current Liabilities:**                                                     |       |              |       |           |       |           |       |             |       |             |       |
| Accounts payable                                                             |       | $                 | 144        |           | $          | 76,403         |       | $                | 43,785     |             | $          | — |   | $ | 120,332 |   |
| Accrued liabilities:                                                         |       |              |       |           |       |           |       |             |       |             |       |
| Payroll and related expenses                                                 |       | 1,927             |       | 31,307         |       | 38,722         |       | —           |       | 71,956           |       |
| Self-insured claims and related expenses                                     |       | —            |       | 22,348         |       | 54,048         |       | —           |       | 76,396           |       |
| Other                                                                        |       | 36,411            |       | 43,797         |       | 66,311         |       | —           |       | 146,519          |       |
| Deferred revenue                                                             |       | —            |       | 205,810        |       | 295,679        |       | —           |       | 501,489          |       |
| Liabilities of discontinued operations                                       |       | —            |       | —         |       | 2,963          |       | —           |       | 2,963            |       |
| Current portion of long-term debt                                            |       | 287,759           |       | 17,285         |       | 74,975         |       | (159,207         | )          | 220,812          |       |
| Total Current Liabilities                                                    |       | 326,241           |       | 396,950        |       | 576,483        |       | (159,207         | )          | 1,140,467        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term Debt**                                                           |       | 3,926,898         |       | 342,888        |       | 5,269          |       | (329,394         | )          | 3,945,661        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Long-Term Liabilities:**                                             |       |              |       |           |       |           |       |             |       |             |       |
| Deferred taxes                                                               |       | —            |       | 768,782        |       | 280,829        |       | (71,987          | )          | 977,624          |       |
| Intercompany payable                                                         |       | 726,389           |       | —         |       | —         |       | (726,389         | )          | —           |       |
| Liabilities of discontinued operations                                       |       | —            |       | —         |       | 4,126          |       | —           |       | 4,126            |       |
| Other long-term obligations, primarily self-insured claims                   |       | 86,789            |       | 3,088          |       | 114,985        |       | —           |       | 204,862          |       |
| Total Other Long-Term Liabilities                                            |       | 813,178           |       | 771,870        |       | 399,940        |       | (798,376         | )          | 1,186,612        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s Equity**                                                |       | 1,134,372         |       | 5,477,423      |       | 1,002,255      |       | (6,479,678       | )          | 1,134,372        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total Liabilities and Shareholder’s Equity**                          |       | $                 | 6,200,689  |           | $          | 6,989,131      |       | $                | 1,983,947  |             | $          | (7,766,655 | ) | $ | 7,407,112 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Financial Position**

**As ofDecember 31, 2008**

**(inthousands)**

 
| ** **                                                                   | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                   | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Current Assets:**                                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash and cash equivalents                                                    |       | $                 | 300,362    |           | $          | 12,105         |       | $                | 93,120     |             | $          | — |   | $ | 405,587 |   |
| Marketable securities                                                        |       | —            |       | —         |       | 22,928         |       | —           |       | 22,928           |       |
| Receivables                                                                  |       | 1,100             |       | 138,623        |       | 387,271        |       | (191,067         | )          | 335,927          |       |
| Inventories                                                                  |       | —            |       | 77,740         |       | 2,278          |       | —           |       | 80,018           |       |
| Prepaid expenses and other assets                                            |       | 11,130            |       | 16,687         |       | 9,831          |       | —           |       | 37,648           |       |
| Deferred customer acquisition costs                                          |       | —            |       | 14,576         |       | 21,938         |       | —           |       | 36,514           |       |
| Deferred taxes                                                               |       | 10,249            |       | 27,755         |       | 4,941          |       | —           |       | 42,945           |       |
| Assets of discontinued operations                                            |       | —            |       | —         |       | 412            |       | —           |       | 412              |       |
| Total Current Assets                                                         |       | 322,841           |       | 287,486        |       | 542,719        |       | (191,067         | )          | 961,979          |       |
| **Property and Equipment:**                                                  |       |              |       |           |       |           |       |             |       |             |       |
| At cost                                                                      |       | —            |       | 213,036        |       | 74,782         |       | —           |       | 287,818          |       |
| Less: accumulated depreciation                                               |       | —            |       | (50,917        | )          | (21,272        | )          | —           |       | (72,189          | )          |
| Net property and equipment                                                   |       | —            |       | 162,119        |       | 53,510         |       | —           |       | 215,629          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Assets:**                                                            |       |              |       |           |       |           |       |             |       |             |       |
| Goodwill                                                                     |       | —            |       | 2,732,432      |       | 361,477        |       | —           |       | 3,093,909        |       |
| Intangible assets, primarily trade names, service marks and  trademarks, net |       | —            |       | 2,133,376      |       | 834,608        |       | —           |       | 2,967,984        |       |
| Notes receivable                                                             |       | 323,688           |       | 778            |       | 24,850         |       | (323,688         | )          | 25,628           |       |
| Long-term marketable securities                                              |       | 9,901             |       | —         |       | 100,233        |       | —           |       | 110,134          |       |
| Investments in and advances to subsidiaries                                  |       | 5,515,710         |       | 1,579,274      |       | 138,363        |       | (7,233,347       | )          | —           |       |
| Other assets                                                                 |       | 93,283            |       | 933            |       | 7,494          |       | (66,360          | )          | 35,350           |       |
| Debt issuance costs                                                          |       | 83,014            |       | —         |       | —         |       | —           |       | 83,014           |       |
| Total Assets                                                                 |       | $                 | 6,348,437  |           | $          | 6,896,398      |       | $                | 2,063,254  |             | $          | (7,814,462 | ) | $ | 7,493,627 |   |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Liabilities and Shareholder’s Equity**                                |       |              |       |           |       |           |       |             |       |             |       |
| **Current Liabilities:**                                                     |       |              |       |           |       |           |       |             |       |             |       |
| Accounts payable                                                             |       | $                 | 370        |           | $          | 44,096         |       | $                | 44,776     |             | $          | — |   | $ | 89,242 |   |
| Accrued liabilities:                                                         |       |              |       |           |       |           |       |             |       |             |       |
| Payroll and related expenses                                                 |       | 1,888             |       | 34,515         |       | 46,633         |       | —           |       | 83,036           |       |
| Self-insured claims and related expenses                                     |       | —            |       | 21,257         |       | 70,666         |       | —           |       | 91,923           |       |
| Other                                                                        |       | 95,582            |       | 38,259         |       | 68,333         |       | —           |       | 202,174          |       |
| Deferred revenue                                                             |       | —            |       | 147,421        |       | 296,005        |       | —           |       | 443,426          |       |
| Liabilities of discontinued operations                                       |       | —            |       | —         |       | 4,870          |       | —           |       | 4,870            |       |
| Current portion of long-term debt                                            |       | 285,365           |       | 17,538         |       | 109,433        |       | (191,067         | )          | 221,269          |       |
| Total Current Liabilities                                                    |       | 383,205           |       | 303,086        |       | 640,716        |       | (191,067         | )          | 1,135,940        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term Debt**                                                           |       | 4,000,424         |       | 347,301        |       | 20,786         |       | (323,688         | )          | 4,044,823        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Long-Term Liabilities:**                                             |       |              |       |           |       |           |       |             |       |             |       |
| Deferred taxes                                                               |       | —            |       | 769,146        |       | 278,960        |       | (66,360          | )          | 981,746          |       |
| Intercompany payable                                                         |       | 749,800           |       | —         |       | —         |       | (749,800         | )          | —           |       |
| Liabilities of discontinued operations                                       |       | —            |       | —         |       | 4,077          |       | —           |       | 4,077            |       |
| Other long-term obligations, primarily self-insured claims                   |       | 82,649            |       | 3,381          |       | 108,652        |       | —           |       | 194,682          |       |
| Total Other Long-Term Liabilities                                            |       | 832,449           |       | 772,527        |       | 391,689        |       | (816,160         | )          | 1,180,505        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s Equity**                                                |       | 1,132,359         |       | 5,473,484      |       | 1,010,063      |       | (6,483,547       | )          | 1,132,359        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total Liabilities and Shareholder’s Equity**                          |       | $                 | 6,348,437  |           | $          | 6,896,398      |       | $                | 2,063,254  |             | $          | (7,814,462 | ) | $ | 7,493,627 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Cash Flows**

**For theThree Months Ended March 31, 2009**

**(inthousands)**

 
| ** **                                                                             | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash and Cash Equivalents at Beginning of Period**                                   |       | $                 | 300,362    |           | $          | 12,105         |       | $                | 93,120     |             | $          | — |   | $ | 405,587 |   |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Net Cash (Used for) Provided from Operating  Activities from Continuing Operations** |       | (105,026          | )          | 73,126         |       | 4,148          |       | (19,856          | )          | (47,608          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Investing Activities from  Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Property additions                                                                     |       | —            |       | (15,865        | )          | (2,743         | )          | —           |       | (18,608          | )          |
| Sale of equipment and other assets                                                     |       | —            |       | 345            |       | 17             |       | —           |       | 362              |       |
| Acquisition of The ServiceMaster Company                                               |       | (486              | )          | —         |       | —         |       | —           |       | (486             | )          |
| Other business acquisitions, net of cash acquired                                      |       | —            |       | (4,871         | )          | —         |       | —           |       | (4,871           | )          |
| Notes receivable, financial investments and securities, net                            |       | —            |       | —         |       | 3,536          |       | —           |       | 3,536            |       |
| **Net Cash (Used for) Provided from Investing  Activities from Continuing Operations** |       | (486              | )          | (20,391        | )          | 810            |       | —           |       | (20,067          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Financing Activities from  Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Payments of debt                                                                       |       | (42,571           | )          | (4,655         | )          | (278           | )          | —           |       | (47,504          | )          |
| Debt issuance costs paid                                                               |       | (198              | )          | —         |       | —         |       | —           |       | (198             | )          |
| Shareholders’ dividends                                                           |       | —            |       | (9,928         | )          | (9,928         | )          | 19,856           |       | —           |       |
| Net intercompany advances                                                              |       | 15,159            |       | (32,630        | )          | 17,471         |       | —           |       | —           |       |
| **Net Cash (Used for) Provided from Financing  Activities from Continuing Operations** |       | (27,610           | )          | (47,213        | )          | 7,265          |       | 19,856           |       | (47,702          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Discontinued Operations:**                                           |       |              |       |           |       |           |       |             |       |             |       |
| Cash used for operating activities                                                     |       | —            |       | —         |       | (980           | )          | —           |       | (980             | )          |
| Cash used for investing activities                                                     |       | —            |       | —         |       | (914           | )          | —           |       | (914             | )          |
| **Net Cash Used for Discontinued Operations**                                          |       | —            |       | —         |       | (1,894         | )          | —           |       | (1,894           | )          |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash (Decrease) Increase During the Period**                                         |       | (133,122          | )          | 5,522          |       | 10,329         |       | —           |       | (117,271         | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and Cash Equivalents at End of Period**                                         |       | $                 | 167,240    |           | $          | 17,627         |       | $                | 103,449    |             | $          | — |   | $ | 288,316 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Cash Flows**

**For theThree Months Ended March 31, 2008**

**(inthousands)**

 
| ** **                                                                             | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash and Cash Equivalents at Beginning of Period**                                   |       | $                 | 100,429    |           | $          | 14,999         |       | $                | 91,791     |             | $          | — |   | $ | 207,219 |   |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Net Cash (Used for) Provided from Operating  Activities from Continuing Operations** |       | (77,641           | )          | 54,583         |       | (24,856        | )          | (17,616          | )          | (65,530          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Investing Activities from  Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Property additions                                                                     |       | —            |       | (6,626         | )          | (2,423         | )          | —           |       | (9,049           | )          |
| Sale of equipment and other assets                                                     |       | —            |       | 687            |       | 24             |       | —           |       | 711              |       |
| Acquisition of The ServiceMaster Company                                               |       | (16,163           | )          | —         |       | —         |       | —           |       | (16,163          | )          |
| Other business acquisitions, net of cash acquired                                      |       | —            |       | (4,385         | )          | —         |       | —           |       | (4,385           | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| Notes receivable, financial investments and securities, net                            |       | —            |       | —         |       | 14,370         |       | —           |       | 14,370           |       |
| **Net Cash (Used for) Provided from Investing  Activities from Continuing Operations** |       | (16,163           | )          | (10,324        | )          | 11,971         |       | —           |       | (14,516          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Financing Activities from  Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Borrowings of debt                                                                     |       | 76,350            |       | —         |       | —         |       | —           |       | 76,350           |       |
| Payments of debt                                                                       |       | (38,162           | )          | (13,150        | )          | (1,481         | )          | —           |       | (52,793          | )          |
| Shareholders’ dividends                                                           |       | —            |       | (8,808         | )          | (8,808         | )          | 17,616           |       | —           |       |
| Net intercompany advances                                                              |       | 4,096             |       | (19,809        | )          | 15,713         |       | —           |       | —           |       |
| **Net Cash Provided from (Used for) Financing  Activities from Continuing Operations** |       | 42,284            |       | (41,767        | )          | 5,424          |       | 17,616           |       | 23,557           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Discontinued Operations:**                                           |       |              |       |           |       |           |       |             |       |             |       |
| Cash provided from operating activities                                                |       | —            |       | —         |       | 4,560          |       | —           |       | 4,560            |       |
| Cash used for investing activities                                                     |       | —            |       | —         |       | (44            | )          | —           |       | (44              | )          |
| Cash used for financing activities                                                     |       | —            |       | —         |       | (51            | )          | —           |       | (51              | )          |
| **Net Cash Provided from Discontinued Operations**                                     |       | —            |       | —         |       | 4,465          |       | —           |       | 4,465            |       |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash (Decrease) Increase During the Period**                                         |       | (51,520           | )          | 2,492          |       | (2,996         | )          | —           |       | (52,024          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and Cash Equivalents at End of Period**                                         |       | $                 | 48,909     |           | $          | 17,491         |       | $                | 88,795     |             | $          | — |   | $ | 155,195 |   |

 

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**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**MergerAgreement**

 

On March 18,2007, ServiceMaster entered into the Merger Agreement with Holdings andAcquisition Co. The Merger Agreement provided that, upon the terms andsubject to the conditions set forth in the Merger Agreement,Acquisition Co. would merge with and into ServiceMaster, withServiceMaster as the surviving corporation.

 

On the ClosingDate, the Merger was completed, and each issued and outstanding share ofServiceMaster common stock, other than shares held by ServiceMaster or Holdingsor their subsidiaries and shares held by stockholders who validly perfectedtheir appraisal rights under Delaware law, was converted into the right toreceive $15.625 in cash. Each share of ServiceMaster common stock owned byServiceMaster, Holdings or Acquisition Co. or any of their respectivedirect or indirect wholly-owned subsidiaries was cancelled and retired, and noconsideration was paid in exchange for it.

 

Immediatelyfollowing the completion of the Merger, all of the outstanding capital stock ofHoldings, the ultimate parent company of ServiceMaster, was owned by investmentfunds sponsored by, or affiliated with, the Equity Sponsors.

 

Equitycontributions totaling $1,431 million from the Equity Sponsors, togetherwith (i) borrowings under the Interim Loan Facility, (ii) borrowingsunder a new $2,650 million senior secured term loan facility and (iii) cashon hand at ServiceMaster, were used, among other things, to finance theaggregate Merger Consideration, to make payments in satisfaction of otherequity-based interests in ServiceMaster under the Merger Agreement, to settleexisting interest rate swaps, to redeem or provide for the repayment of certainof the Company’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150 millionpre-funded letter of credit facility were used to replace and/or secure lettersof credit previously issued under a ServiceMaster credit facility that wasterminated as of the Closing Date. On the Closing Date, the Company alsoentered into, but did not draw under, the Revolving Credit Facility.

 

The Interim LoanFacility matured on July 24, 2008. On the maturity date, outstandingamounts under the Interim Loan Facility were converted on a one to one basisinto the Permanent Notes. The Permanent Notes were issued pursuant to arefinancing indenture. In connection with the issuance of Permanent Notes,ServiceMaster entered into a Registration Rights Agreement, pursuant to whichServiceMaster filed with the SEC a registration statement with respect to theresale of the Permanent Notes, which was declared effective on January 16,2009. ServiceMaster’s obligation under the Registration Rights Agreement tokeep the registration statement effective has terminated. Accordingly,ServiceMaster may choose to deregister the Permanent Notes and terminate theeffectiveness of the registration statement at any time.

 

**Resultsof Operations**

 

**FirstQuarter 2009 Compared to 2008**

 

The Companyreported first quarter 2009 revenue of $645.9 million, a $13.7 million or 2.2percent increase compared to 2008. Revenue for the first quarter of 2008 hasbeen reduced by $21.8 million (non-cash) resulting from recording deferredrevenue at its fair value in connection with purchase accounting. Excludingthis impact of purchase accounting, revenue for the first quarter of 2009decreased $8.1 million, or 1.2 percent, from 2008 levels, driven by the resultsof our business units as described in our “Segment Reviews for the FirstQuarter 2009 Compared to 2008”.

 

Operating incomewas $28.7 million for the first quarter of 2009 compared to an operating lossof $10.3 million for the first quarter of 2008. Loss from continuingoperations before income taxes was $6.8 million for the first quarter of 2009compared to $106.1 million for the first quarter of 2008. The decrease inloss from continuing operations before income taxes of $99.2 million reflectsthe net effect of:

 
| **(In millions)**                                 | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|
| Non-cash purchase accounting adjustments (1)           |       | $          | 23.0       |   |
| Decreased interest expense (2)                         |       | 12.9       |       |
| Decreased interest and net investment loss (3)         |       | 1.3        |       |
| Increased restructuring and merger related charges (4) |       | (5.4       | )          |
| Gain on extinguishment of debt (5)                     |       | 46.1       |       |
| Improved segment results (6)                           |       | 21.3       |       |
|                                                   |       | $          | 99.2       |   |

 

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(1)           The net favorable impact of non-cashpurchase accounting adjustments for the first quarter of 2009 of $23.0 millionconsists primarily of decreased amortization of intangible assets of $10.7million and a $21.8 million increase in revenue partially offset by increaseddeferred customer acquisition expense of $9.7 million.

 

(2)           Represents a decrease in interest expenseas a result of decreases in our weighted average interest rates, partiallyoffset by increases in our weighted average long-term debt balances as comparedto the first quarter of 2008.

 

(3)           As further described in “Operating andNon-Operating Expenses”, represents a decrease in interest and net investmentloss.

 

(4)           Represents an increase in restructuringcharges primarily resulting from Fast Forward and a branch optimization projectat Terminix.

 

(5)           Represents the gain on extinguishment ofdebt recorded in the first quarter of 2009 related to the completion of openmarket purchases of $89.0 million in face value of our Permanent Notes.

 

(6)           Represents an increase in income fromcontinuing operations before income taxes, non-cash purchase accountingadjustments, interest expense, interest and net investment loss, gain onextinguishment of debt, merger related charges and restructuring chargessupported by the improved results at TruGreen LawnCare, TruGreen LandCare,Terminix and American Home Shield as described in our “Segment Reviews for theFirst Quarter 2009 Compared to 2008”.

 

***Operating andNon-Operating Expenses***

 

The Companyreported cost of services rendered and products sold of $394.4 million for thefirst quarter of 2009 compared to $417.4 million for the first quarter of2008. Excluding the unfavorable non-cash reduction of revenue of $21.8 millionfor the first quarter of 2008 resulting from recording deferred revenue at itsfair value in conjunction with purchase accounting, as a percentage of revenue,these costs decreased to 61.1 percent for the first quarter of 2009 from 63.8percent for the first quarter of 2008. This primarily reflects the impact ofimproved labor efficiency, lower vehicle fleet counts and reduced fuel costs atTruGreen LawnCare, TruGreen LandCare and Terminix and favorable damage claim trendsat Terminix, partially offset by increased fertilizer costs at TruGreenLawnCare and other factor costs throughout the enterprise.

 

The Companyreported selling and administrative expenses of $173.8 million for the firstquarter of 2009 compared to $171.1 million for the first quarter of 2008. Thefirst quarter of 2008 includes a $9.7 million (non-cash) decrease in sellingand administrative expenses resulting from recording deferred customeracquisition costs at their fair value in connection with purchase accounting.Excluding the impact of purchase accounting, these costs decreased, as apercentage of revenue, to 26.9 percent for the first quarter of 2009 from27.6 percent for the first quarter of 2008. This primarily reflects theimpact of improved sales labor efficiency at TruGreen LawnCare and Terminix,lower advertising costs at American Home Shield and lower overhead coststhroughout the enterprise, partially offset by increased compensation chargesfor the Company resulting from a change in the market value of investmentswithin an employee deferred compensation trust (for which there is acorresponding and offsetting change within interest and net investment loss).

 

Amortizationexpense was $40.3 million for the first quarter of 2009 compared to$50.7 million for the first quarter of 2008. The decrease is a result ofamortization being included in the first quarter of 2008 related to finitelived intangible assets recorded in connection with the Merger which had livesof one year or less and were fully amortized as of July 24, 2008.

 

Non-operatingexpense totaled $35.5 million for the first quarter of 2009 compared to$95.8 million for the first quarter of 2008. This change includes a $46.1million gain on extinguishment of debt, a $12.9 million decrease ininterest expense primarily resulting from decreases in our weighted averageinterest rates, partially offset by increases in our weighted average long-termdebt balances, and a $1.3 million decrease in interest and net investment loss.Interest and net investment loss was comprised of the following for the threemonths ended March 31, 2009 and 2008:

 

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| ** **                       | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|
| **(In millions)**           | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Realized gains(1)                |       | $                                                | 0.6        |   | $ | 0.7 |   |
| Impairments(2)                   |       | (5.4                                             | )          | (5.2 | ) |
| Deferred compensation trust(3)   |       | (0.7                                             | )          | (2.6 | ) |
| Other(4)                         |       | 0.7                                              |       | 1.1 |   |
| Interest and net investment loss |       | $                                                | (4.8       | ) | $ | (6.0 | ) |

 

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(1)           Represents the net investment gains(losses) and the interest and dividend income realized on the American HomeShield investment portfolio.

 

(2)           Represents other than temporary declinesin the value of certain investments in the American Home Shield investmentportfolio.

 

(3)           Represents investment loss resulting froma change in the market value of investments within an employee deferredcompensation trust (for which there is a corresponding and offsetting change incompensation expense within loss from continuing operations before incometaxes).

 

(4)           Represents a portion of the earningsgenerated by ServiceMaster Acceptance Company Limited Partnership (“SMAC”), ourfinancing subsidiary exclusively dedicated to providing financing to ourfranchisees and retail customers of our operating units, and interest income onother cash balances.

 

The effective tax rate on loss from continuing operations was a benefitof 110.4 percent for the first quarter of 2009 compared to a benefit of 29.2percent for the first quarter of 2008. The change in the effective tax rate is primarily due to state taxexpense offsetting the statutory federal benefit generated due to losses in2008 compared to state tax expense increasing the annual projected tax expensein 2009.  In addition, the tax benefitfor the first quarter of 2009 includes the release of liability related tofederal and state uncertain tax positions recorded in prior years.

 

***Restructuring and Merger Related Charges***

 

The Company isengaged in a reorganization and restructuring of certain of its businesses andsupport functions known as Fast Forward. Among the purposes of Fast Forward isto eliminate layers and bureaucracy and simplify work processes in order tobetter align the Company’s work processes around its operational and strategicobjectives. Fast Forward is being implemented in phases. The first phaseinvolved, among other things, a reduction in work force and various processimprovements, including the closing of American Home Shield’s call centerlocated in Santa Rosa, California. The second phase includes the organizationof certain corporate support functions into centers of excellence which areexpected to deliver higher quality services to our business units at lowercosts, the outsourcing to third party vendors of various business activitiesthat currently are handled internally, as well as other employee workforcereductions expected to result in cost-savings.

 

The first phase ofFast Forward was substantially completed in the first quarter of 2008, and thesecond phase is underway. As part of the second phase of Fast Forward, on December 11,2008, the Company entered into an agreement with IBM pursuant to which IBM willprovide information technology operations and applications development servicesto the Company. The initial term of the agreement is seven years. The agreementcommenced on December 11, 2008 and the services are expected to be phasedin over approximately a six month period. In connection with the agreement, theCompany expects to eliminate approximately 275 positions. As a result of theelimination of positions and the transition of information technology servicesto IBM, the Company has incurred and expects to continue to incur chargesrelated to, among other things, employee retention and severance costs andtransition fees paid to IBM. Almost all charges related to the agreement willbe cash charges and will be expensed throughout the transition period. Suchcharges are expected to amount to $10 to $15 million, pre-tax, and will be recordedas restructuring charges in the condensed consolidated statement of operationsprincipally in the first half of 2009.

 

The Companyexpects that it will incur additional costs in order to implement the secondphase of Fast Forward but is currently unable to estimate the aggregate amountor timing of such charges or the anticipated related cash outlays. The Companyis on schedule with respect to realizing its previously forecasted savings fromFast Forward. The Company believes that it will ultimately realize annualizedpre-tax savings of at least $60 million by the end of 2009. Most of thesesavings are expected to benefit the selling, general and administrative line inthe statement of operations.

 

In connection with FastForward, the Company incurred costs of approximately $5.3 million and $2.6million for the three months ended March 31, 2009 and 2008, respectively.For the three months ended March 31, 2009, such costs included transitionfees paid to IBM of approximately $3.8 million, employee retention andseverance costs of approximately $0.9 million and consulting and other costs ofapproximately $0.6 million. For the three months ended March 31, 2008,these charges included consulting fees of approximately $1.6 million andseverance and other costs of approximately $1.0 million.

 

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For the three monthsended March 31, 2009, Terminix incurred restructuring costs ofapproximately $3.2 million relating to a branch optimization project, whichincluded approximately $2.9 million of lease termination costs andapproximately $0.3 million of severance costs.

 

The results forthe three months ended March 31, 2008 include restructuring chargesrelated to the Company’s consolidation of its corporate headquarters into itsoperations support center in Memphis, Tennessee and the closing of itsheadquarters in Downers Grove, Illinois. The transition to Memphis wassubstantially completed in 2007. Almost all costs related to the transitionwere cash expenditures and were expensed throughout the transition period.During the three months ended March 31, 2008, the Company incurred $0.7million relating to this relocation, which includes severance and other costs.

 

During the three monthsended March 31, 2009 and 2008, the Company incurred Merger related chargestotaling $0.3 million and $0.1 million, respectively. These Merger relatedcharges include investment banking, accounting, legal and other costsassociated with the Merger, which cannot be capitalized as part of the purchasecost for financial reporting purposes.

 

**KeyPerformance Indicators**

 

The table belowpresents selected operating metrics related to customer counts and customerretention for the three largest profit businesses in the Company. Thesemeasures are presented on a rolling, twelve-month basis in order to avoidseasonal anomalies.

 
| ** **                               | ** ** | **Key Performance Indicators  as of March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                                                 | ** ** | **2008** | ** ** |
| **TruGreen LawnCare(1)—**           |       |                                                                     |       |   |   |
| Reduction in Full Program Accounts(1)    |       | (3                                                                       | )%         | (4 | )% |
| Customer Retention Rate(1)               |       | 66.3                                                                     | %          | 67.0 | % |
| **Terminix—**                       |       |                                                                     |       |   |   |
| Growth in Pest Control Customers         |       | 3                                                                        | %          | 1 | % |
| Pest Control Customer Retention Rate     |       | 77.9                                                                     | %          | 77.9 | % |
| (Reduction) Growth in Termite Customers  |       | (1                                                                       | )%         | 2 | % |
| Termite Customer Retention Rate          |       | 86.3                                                                     | %          | 87.8 | % |
| **American Home Shield—**           |       |                                                                     |       |   |   |
| (Reduction) Growth in Warranty Contracts |       | (2                                                                       | )%         | 4 | % |
| Customer Retention Rate                  |       | 62.2                                                                     | %          | 62.0 | % |

 

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(1)           During thethird quarter of 2008, TruGreen LawnCare changed its definition of Full ProgramAccounts to include sales in the second half of the year with the completion ofthe initial full program to occur in the first half of the following year.Prior to the third quarter of 2008 such sales were reflected as full programaccounts and included in customer retention in the first quarter of the yearfollowing the sale. Reduction in Full Program Accounts and Customer RetentionRate for 2008 have been adjusted to conform to the new definition.

 

**Segment Reviews for the First Quarter2009 Compared to 2008**

 

The following business segment reviews should be read in conjunctionwith the required footnote disclosures presented in the Notes to the condensedconsolidated financial statements. This disclosure provides a reconciliation ofsegment operating income to income from continuing operations before incometaxes, with net non-operating expenses as the only reconciling item.

 

The Company uses Adjusted EBITDA and Comparable Operating Performanceto facilitate operating performance comparisons from period to period. AdjustedEBITDA and Comparable Operating Performance are supplemental measures of theCompany’s performance that are not required by, or presented in accordancewith, GAAP. Adjusted EBITDA and 

 

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ComparableOperating Performance are not measurements of the Company’s financialperformance under GAAP and should not be considered as alternatives to netincome or any other performance measures derived in accordance with GAAP or asalternatives to net cash provided by operating activities or any other measuresof the Company’s cash flow or liquidity. “Adjusted EBITDA” means net income beforenet income (loss) from discontinued operations; provision (benefit) for incometaxes; minority interest and other expense, net; interest expense and interestand net investment income; and depreciation and amortization expense; as wellas adding back interest and net investment income and non-cash trade nameimpairment. “Comparable Operating Performance” is calculated by adding back toAdjusted EBITDA non-cash option and restricted stock expense and non-casheffects on Adjusted EBITDA attributable to the application of purchaseaccounting in connection with the Merger.

 

The Company believes Adjusted EBITDA facilitates company-to-companyoperating performance comparisons by backing out potential differences causedby variations in capital structures (affecting net interest income andexpense), taxation and the age and book depreciation of facilities andequipment (affecting relative depreciation expense), which may vary fordifferent companies for reasons unrelated to operating performance. The Companyuses Comparable Operating Performance as a supplemental measure to assess theCompany’s performance because it excludes non-cash option and restricted stockexpense and non-cash effects on Adjusted EBITDA attributable to the applicationof purchase accounting in connection with the Merger. The Company presentsComparable Operating Performance because it believes that it is useful forinvestors, analysts and other interested parties in their analysis of theCompany’s operating results.

 

Adjusted EBITDA and Comparable Operating Performance are notnecessarily comparable to other similarly titled financial measures of othercompanies due to the potential inconsistencies in the method of calculation.

 

Adjusted EBITDA and Comparable Operating Performance have limitationsas analytical tools, and should not be considered in isolation or assubstitutes for analyzing the Company’s results as reported under GAAP. Some ofthese limitations are:

 

·      Adjusted EBITDA andComparable Operating Performance do not reflect changes in, or cashrequirements for, the Company’s working capital needs;

 

·      Adjusted EBITDA andComparable Operating Performance do not reflect the Company’s interest expense,or the cash requirements necessary to service interest or principal payments onthe Company’s debt;

 

·      Adjusted EBITDA andComparable Operating Performance do not reflect the Company’s tax expense orthe cash requirements to pay the Company’s taxes;

 

·      Adjusted EBITDA andComparable Operating Performance do not reflect historical cash expenditures orfuture requirements for capital expenditures or contractual commitments;

 

·      Although depreciation andamortization are non-cash charges, the assets being depreciated and amortizedwill often have to be replaced in the future, and Adjusted EBITDA andComparable Operating Performance do not reflect any cash requirements for suchreplacements; and

 

·      Other companies in theCompany’s industries may calculate Adjusted EBITDA and Comparable OperatingPerformance differently, limiting their usefulness as comparative measures.

 

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Operating revenues and Comparable OperatingPerformance by operating segment are as follows:

 
| ** **                                                            | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                                               | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Operating Revenue:                                                    |       |                                             |       |   |   |
| TruGreen LawnCare                                                     |       | $                                                | 134,666    |   | $ | 134,442 |   |
| TruGreen LandCare                                                     |       | 66,885                                           |       | 78,652 |   |
| Terminix                                                              |       | 263,161                                          |       | 261,648 |   |
| American Home Shield                                                  |       | 130,868                                          |       | 105,418 |   |
| Other Operations and Headquarters                                     |       | 50,347                                           |       | 52,071 |   |
| Total Operating Revenue                                               |       | $                                                | 645,927    |   | $ | 632,231 |   |
| Comparable Operating Performance:                                     |       |                                             |       |   |   |
| TruGreen LawnCare                                                     |       | $                                                | 2,197      |   | $ | (6,737 | ) |
| TruGreen LandCare                                                     |       | 8,426                                            |       | 4,697 |   |
| Terminix                                                              |       | 62,113                                           |       | 55,499 |   |
| American Home Shield                                                  |       | 10,973                                           |       | 5,784 |   |
| Other Operations and Headquarters                                     |       | (2,191                                           | )          | 1,932 |   |
| Total Comparable Operating Performance                                |       | $                                                | 81,518     |   | $ | 61,175 |   |
|                                                                  |       |                                             |       |   |   |
| Memo: Items included in Comparable Operating Performance              |       |                                             |       |   |   |
| Restructuring charges and Merger related expenses(1)                  |       | $                                                | 8,777      |   | $ | 3,375 |   |
| Management fee(2)                                                     |       | $                                                | 500        |   | $ | 500 |   |
|                                                                  |       |                                             |       |   |   |
| Memo: Items excluded from Comparable Operating Performance            |       |                                             |       |   |   |
| Comparable Operating Performance of InStar                            |       | $                                                | (244       | ) | $ | (976 | ) |
| Comparable Operating Performance of all other discontinued operations |       | (20                                              | )          | (161 | ) |
| Comparable Operating Performance of discontinued operations           |       | $                                                | (264       | ) | $ | (1,137 | ) |

 

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(1)           Includes (i) charges related to Fast Forward, (ii) chargesrelated to a branch optimization project at Terminix and (iii) chargesrelated to the Company’s decision to consolidate its corporate headquartersinto its operations support center in Memphis, Tennessee and close its formerheadquarters in Downer’s Grove, Illinois and (iv) Merger related charges.

 

(2)           Represents a management fee payable toCD&R pursuant to a consulting agreement under which CD&R provides theCompany with on-going consulting and management advisory services in exchangefor an annual management fee of $2 million. This fee is payable quarterly.

 

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Thefollowing table presents reconciliations of operating (loss) income, the mostdirectly comparable financial measure under GAAP, to Adjusted EBITDA andComparable Operating Performance for the periods presented.

 
| **(In thousands)**                                               | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home  Shield** | ** ** | **Other  Operations &  Headquarters** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------|------------|------------------------------------------------|------------|------------|------------|
| ** **                                                            | ** ** | ** **             | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                 | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| **Three Months Ended March 31, 2009**                            |       |                   |       |                   |       |         |       |                       |       |                                           |       |       |       |
| Operating (loss) income (1)                                           |       | $                      | (19,387    | )                      | $          | 5,696        |       | $                          | 46,491     |                                           | $          | 5,454      |       | $ | (9,576 | ) | $ | 28,678 |   |
| Depreciation and amortization expense                                 |       | 21,613                 |       | 2,893                  |       | 15,564       |       | 10,403                     |       | 5,447                                          |       | 55,920     |       |
| EBITDA before interest and net investment (loss) income               |       | 2,226                  |       | 8,589                  |       | 62,055       |       | 15,857                     |       | (4,129                                         | )          | 84,598     |       |
| Interest and net investment (loss) income (2)                    |       | —                 |       | —                 |       | —       |       | (4,765                     | )          | 4                                              |       | (4,761     | )          |
| Adjusted EBITDA                                                       |       | 2,226                  |       | 8,589                  |       | 62,055       |       | 11,092                     |       | (4,125                                         | )          | 79,837     |       |
| Non-cash option and restricted stock expense                          |       | —                 |       | —                 |       | —       |       | —                     |       | 1,934                                          |       | 1,934      |       |
| Non-cash (credits) charges attributable to purchase accounting(3)     |       | (29                    | )          | (163                   | )          | 58           |       | (119                       | )          | —                                         |       | (253       | )          |
| Comparable Operating Performance                                      |       | 2,197                  |       | 8,426                  |       | 62,113       |       | 10,973                     |       | (2,191                                         | )          | 81,518     |       |
|                                                                  |       |                   |       |                   |       |         |       |                       |       |                                           |       |       |       |
| Memo: Items included in Comparable Operating Performance              |       |                   |       |                   |       |         |       |                       |       |                                           |       |       |       |
| Restructuring charges and merger related charges(4)                   |       | $                      | —     |                   | $          | (30          | )          | $                          | 3,220      |                                           | $          | 39         |       | $ | 5,548 |   | $ | 8,777 |   |
| Management fee(5)                                                     |       | $                      | —     |                   | $          | —       |       | $                          | —     |                                           | $          | —     |       | $ | 500 |   | $ | 500 |   |
|                                                                  |       |                   |       |                   |       |         |       |                       |       |                                           |       |       |       |
| Memo: Items excluded from Comparable Operating Performance            |       |                   |       |                   |       |         |       |                       |       |                                           |       |       |       |
| Comparable Operating Performance of InStar                            |       | $                      | —     |                   | $          | —       |       | $                          | —     |                                           | $          | —     |       | $ | (244 | ) | $ | (244 | ) |
| Comparable Operating Performance of all other discontinued operations |       | —                 |       | —                 |       | —       |       | —                     |       | (20                                            | )          | (20        | )          |
| Comparable Operating Performance of discontinued operations           |       | $                      | —     |                   | $          | —       |       | $                          | —     |                                           | $          | —     |       | $ | (264 | ) | $ | (264 | ) |
| ** **                                                            | ** ** | ** **             | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                 | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| **Three Months Ended March 31, 2008**                            |       |                   |       |                   |       |         |       |                       |       |                                           |       |       |       |
| Operating (loss) income(1)                                            |       | $                      | (34,059    | )                      | $          | 2,091        |       | $                          | 43,213     |                                           | $          | (17,692    | )          | $ | (3,855 | ) | $ | (10,302 | ) |
| Depreciation and amortization expense                                 |       | 27,309                 |       | 2,769                  |       | 15,012       |       | 12,683                     |       | 5,459                                          |       | 63,232     |       |
| EBITDA before interest and net investment loss                        |       | (6,750                 | )          | 4,860                  |       | 58,225       |       | (5,009                     | )          | 1,604                                          |       | 52,930     |       |
| Interest and net investment loss(2)                                   |       | —                 |       | —                 |       | —       |       | (4,501                     | )          | (1,544                                         | )          | (6,045     | )          |
| Adjusted EBITDA                                                       |       | (6,750                 | )          | 4,860                  |       | 58,225       |       | (9,510                     | )          | 60                                             |       | 46,885     |       |
| Non-cash option and restricted stock expense                          |       | —                 |       | —                 |       | —       |       | —                     |       | 1,664                                          |       | 1,664      |       |
| Non-cash charges (credits) attributable to purchase accounting(3)     |       | 13                     |       | (163                   | )          | (2,726       | )          | 15,294                     |       | 208                                            |       | 12,626     |       |
| Comparable Operating Performance                                      |       | $                      | (6,737     | )                      | $          | 4,697        |       | $                          | 55,499     |                                           | $          | 5,784      |       | $ | 1,932 |   | $ | 61,175 |   |
|                                                                  |       |                   |       |                   |       |         |       |                       |       |                                           |       |       |       |
| Memo: Items included in Comparable Operating Performance              |       |                   |       |                   |       |         |       |                       |       |                                           |       |       |       |
| Restructuring charges and merger related charges(4)                   |       | $                      | 281        |                   | $          | (421         | )          | $                          | 57         |                                           | $          | —     |       | $ | 3,458 |   | $ | 3,375 |   |
| Management fee(5)                                                     |       | $                      | —     |                   | $          | —       |       | $                          | —     |                                           | $          | —     |       | $ | 500 |   | $ | 500 |   |
|                                                                  |       |                   |       |                   |       |         |       |                       |       |                                           |       |       |       |
| Memo: Items excluded from Comparable Operating Performance            |       |                   |       |                   |       |         |       |                       |       |                                           |       |       |       |
| Comparable Operating Performance of InStar                            |       | $                      | —     |                   | $          | —       |       | $                          | —     |                                           | $          | —     |       | $ | (976 | ) | $ | (976 | ) |
| Comparable Operating Performance of all other discontinued operations |       | —                 |       | —                 |       | —       |       | —                     |       | (161                                           | )          | (161       | )          |
| Comparable Operating Performance of discontinued operations           |       | $                      | —     |                   | $          | —       |       | $                          | —     |                                           | $          | —     |       | $ | (1,137 | ) | $ | (1,137 | ) |

 

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(1)           Presented below is a reconciliation oftotal segment operating income (loss) to net income (loss).

 
| ** **                                             | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                                | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Total Segment Operating Income (Loss)                  |       | $                                                | 28,678     |   | $ | (10,302 | ) |
| Non-operating expense (income):                        |       |                                             |       |   |   |
| Interest expense                                       |       | 76,666                                           |       | 89,586 |   |
| Interest and net investment loss                       |       | 4,761                                            |       | 6,045 |   |
| Gain on extinguishment of debt                         |       | (46,106                                          | )          | — |   |
| Other expense, net                                     |       | 200                                              |       | 132 |   |
| Loss from Continuing Operations before Income Taxes    |       | $                                                | (6,843     | ) | $ | (106,065 | ) |
| Benefit for income taxes                               |       | (7,555                                           | )          | (30,971 | ) |
| Income (Loss) from Continuing Operations               |       | $                                                | 712        |   | $ | (75,094 | ) |
| Loss from discontinued operations, net of income taxes |       | (163                                             | )          | (748 | ) |
| Net Income (Loss)                                      |       | $                                                | 549        |   | $ | (75,842 | ) |

 

(2)           Interest and net investment loss is primarilycomprised of investment income and realized gain (loss) on our American HomeShield segment investment portfolio. Cash, short-term and long-term marketablesecurities associated with regulatory requirements in connection with AmericanHome Shield and for other purposes totaled approximately $255.1 million as of March 31,2009. American Home Shield interest and net investment loss was$4.8 million and $4.5 million for the first quarter of 2009 and 2008,respectively. The balance of interest and investment loss primarily relates to (i) aportion of the earnings generated by SMAC, (ii) investment loss from ouremployee deferred compensation trust (for which there is a corresponding andoffsetting change in compensation expense within loss from continuingoperations before income taxes), and (iii) interest income on other cashbalances.

 

(3)           The Merger was accounted for usingpurchase accounting. This adjustment represents the aggregate, non-cashadjustments (other than amortization and depreciation) attributable to theapplication of purchase accounting.

 

(4)           Includes (i) charges related to FastForward, (ii) charges related to a branch optimization project atTerminix, (iii) charges related to the Company’s decision to consolidateits corporate headquarters into its operations support center in Memphis,Tennessee and close its former headquarters in Downer’s Grove, Illinois and (iv) Mergerrelated charges.

 

(5)           Represents a management fee payable toCD&R pursuant to a consulting agreement under which CD&R provides theCompany with on-going consulting and management advisory services in exchangefor an annual management fee of $2 million. This fee is payable quarterly.

 

***TruGreen LawnCareSegment***

 

The TruGreen LawnCare segment, which includes lawn, tree and shrub careservices, reported comparable revenue, a 43.1 percent decrease in operatingloss and a 132.6 percent increase in Comparable Operating Performance for thefirst quarter of 2009 compared to 2008. The revenue results were impacted byimproved price realization, offset by a decline in customer counts. Customercounts at March 31, 2009 were 2.9 percent lower than last year’s level dueto a 70 basis point decline in the rolling twelve-month customer retention rateand a decline in new unit sales. Trends in retention and new unit sales wereadversely impacted by soft customer demand. TruGreen LawnCare remains committedto improving customer retention by focusing on the overall quality of servicedelivery, including the Lawn Quality Audit program, the reduction of routemanager turnover and the continued improvement of overall communication withcustomers.

 

Comparable Operating Performance improved $8.9 million for the firstquarter of 2009 compared to 2008, which also reflects effective management ofseasonal staffing of production and sales labor, lower vehicle fleet counts,reduced fuel costs and the favorable impact of acquiring assets in connectionwith exiting certain fleet leases in 2008, offset, in part, by increasedfertilizer costs.

 

***TruGreen LandCareSegment***

 

The TruGreen LandCare segment, which includeslandscape maintenance services, reported a 15.0 percent decline in revenue, a172.4 percent increase in operating income and a 79.4 percent increase in ComparableOperating Performance 

 

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forthe first quarter of 2009 compared to 2008. The decline in revenue included a9.7 percent decline in base contract maintenance revenue, a 32.8 percentdecline in enhancement revenue and a 20.4 percent increase in snow removalservice revenue. Revenue for the first quarter of 2009 was adversely impactedby TruGreen LandCare’s continued efforts to improve the quality of its customerbase with a better customer mix by pruning less profitable jobs, implementingstricter pricing on new sales, and increasing the average size of new proposalsand sales. In addition, revenue trends were adversely impacted by soft customerdemand.

 

Comparable Operating Performance improved $3.7 millionfor the first quarter of 2009 compared to 2008, which also reflects improvedmaterials and labor management on the base contract maintenance portfolio,lower vehicle fleet counts, reduced fuel costs and overhead spending and thefavorable impact of acquiring assets in connection with exiting certain fleetleases in 2008.

 

***Terminix Segment***

 

The Terminix segment, which includes termite and pestcontrol services, reported a 0.6 percent increase in revenue for the firstquarter of 2009 compared to 2008. Revenue for the first quarter of 2008 hasbeen reduced by $2.2 million (non-cash) as a result of recording deferredrevenue at its fair value in connection with purchase accounting. Excludingthis impact of purchase accounting, revenue for the first quarter of 2009 wascomparable to 2008. Terminix reported a 7.6 percent increase in operatingincome and an 11.9 percent increase in Comparable Operating Performancefor the first quarter of 2009 compared to 2008. The segment’s overall revenueresults, excluding purchase accounting, reflected modest growth in pest controlrevenues offset by a decline in revenue from termite contract renewals andtermite completions. Pest control revenues increased 2.6 percent for the firstquarter of 2009 compared to 2008, reflecting an increase in new unit sales andthe impact of acquisitions. A 0.4 percent decline in termite renewal revenuesfor the first quarter of 2009 compared to 2008 was due to a 150 basis pointdecline in termite customer retention. Revenue from termite completionsdeclined 6.1 percent for the first quarter of 2009 compared to 2008, due, inpart, to reduced average pricing on new termite treatments. Trends in retentionand new unit sales were adversely impacted by soft customer demand.

 

Terminix’s Comparable Operating Performance includesthe impact of $3.2 million of restructuring charges for the first quarter of2009 as compared to 2008. These restructuring charges relate to a branchoptimization program and include approximately $2.9 million of leasetermination costs and approximately $0.3 million of severance costs. Excludingthe impact of restructuring charges, Comparable Operating Performance improved17.6 percent for the first quarter of 2009 as compared to 2008, which alsoreflects favorable termite damage claims trends, effective management ofseasonal staffing of production and sales labor, lower vehicle fleet counts,reduced fuel costs and overhead spending and the favorable impact of acquiringassets in connection with exiting certain fleet leases in 2008.

 

***American HomeShield Segment***

 

The American Home Shield segment, which provides homewarranties to consumers that cover heating, ventilation, air conditioning,plumbing and other systems and appliances, reported a 24.1 percent increase inrevenue for the first quarter of 2009 compared to 2008. Revenue for the firstquarter of 2008 has been reduced by $19.6 million (non-cash) as a result ofrecording deferred revenue at its fair value in connection with purchaseaccounting. Excluding this impact of purchase accounting, American Home Shieldreported a 4.7 percent increase in revenue for the first quarter of 2009compared to 2008. The trend in revenue resulted primarily from higher contractcosts in the quarter due to differences between years in the timing of theincidence of warranty claims. American Home Shield recognizes revenue over thecontract period in proportion to expected direct costs. Total warranty contractswritten declined 0.2 percent, which is comprised of a 4.8 percent increase inthe average price per contract offset by a 4.7 percent decline in total newcontract and renewal sales units. This decline in sales units is primarilycomprised of a 16.8 percent decrease in sales in the real estate market and a10.7 percent decrease in consumer sales partially offset by a 0.7 percentincrease in renewal sales. American Home Shield’s sales in the real estatemarket were significantly impacted by the continued softness in the home resalemarket throughout most of the country.

 

American Home Shield reported a 130.8 percentincrease in operating income and an 89.7 percent increase in ComparableOperating Performance for the first quarter of 2009 compared to 2008. Theincrease in Comparable Operating Performance also reflects a decrease inadvertising spending primarily due to differences between the years in thetiming of the advertising activities.

 

***Other Operationsand Headquarters Segment***

 

This segment includes the operations of ServiceMasterClean and Merry Maids, as well as the Company’s 

 

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headquartersfunctions. The segment reported a 3.3 percent decline in revenue, a 148.4percent increase in operating loss and a 213.4 percent decline in ComparableOperating Performance for the first quarter of 2009 compared to 2008. TheServiceMaster Clean and Merry Maids operations reported a combined 3.3 percentdecline in revenue for the first quarter of 2009. The decline in revenueresulted from decreases in product sales, offset partially by increases inother franchise revenues. The ServiceMaster Clean and Merry Maids operationsreported a combined increase in operating income of 21.4 percent and anincrease in Comparable Operating Performance of 13.9 percent for the firstquarter of 2009 driven primarily by a shift in the mix of ServiceMaster Clean’srevenue to higher margin disaster restoration services and reduced overheadspending as compared to 2008. The favorable operating results in theServiceMaster Clean and Merry Maids operations were offset by an unfavorableyear over year comparison in insurance expenses due to a favorable adjustmentto prior-year insurance reserves of approximately $3.3 million recorded by theCompany in the first quarter of 2008, as well as higher functional supportcosts as compared to the first quarter of 2008.

 

***DiscontinuedOperations***

 

The components of loss from discontinued operations,net of income taxes, and the reconciliation of operating loss to AdjustedEBITDA and Comparable Operating Performance for the three months ended March 31,2009 and 2008 are as follows:

 
| ** **                                             | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                                | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Operating Loss                                         |       | $                                                | (264       | ) | $ | (1,137 | ) |
| Interest expense                                       |       | —                                           |       | (41 | ) |
| Loss from discontinued operations, before income taxes |       | (264                                             | )          | (1,178 | ) |
| Benefit for income taxes                               |       | (101                                             | )          | (430 | ) |
| Loss from discontinued operations, net of income taxes |       | $                                                | (163       | ) | $ | (748 | ) |
|                                                   |       |                                             |       |   |   |
| Operating Loss                                         |       | $                                                | (264       | ) | $ | (1,137 | ) |
| Depreciation and amortization expense                  |       | —                                           |       | — |   |
| EBITDA before interest and net investment income       |       | (264                                             | )          | (1,137 | ) |
| Interest and net investment income                     |       | —                                           |       | — |   |
| Adjusted EBITDA                                        |       | (264                                             | )          | (1,137 | ) |
| Non-cash option and restricted stock expense           |       | —                                           |       | — |   |
| Non-cash charges attributable to purchase accounting   |       | —                                           |       | — |   |
| Comparable Operating Performance                       |       | $                                                | (264       | ) | $ | (1,137 | ) |

 

**FINANCIALPOSITION AND LIQUIDITY**

 

***Cash Flows from Operating Activities from ContinuingOperations***

 

Netcash used for operating activities from continuing operations was $47.6 millionfor the first quarter of 2009 compared to $65.5 million for the firstquarter of 2008.

 

Theprincipal components (in millions) of the net decrease for the firstquarter of 2009 were:

 
| Increase in net income before Merger related charges, restructuring  charges and non-cash charges |   | $     | 56.9   |   |
|---------------------------------------------------------------------------------------------------|--------|-------|--------|--------|
| Decrease in restructuring payments                                                                |   | 9.6   |   |
| Increase in working capital requirements                                                          |   | (48.6 | )      |
|                                                                                              |   | $     | 17.9   |   |

 

Theincrease in net income before Merger related charges, restructuring charges andnon-cash charges for the three months ended March 31, 2009 was driven byComparable Operating Performance growth at TruGreen LawnCare, TruGreenLandCare, Terminix and American Home Shield. The increase in working capitalrequirements for the three months ended March 31, 2009 was drivenprimarily by decreased customer prepayments, non-cash purchase accountingadjustments recorded in connection with the Merger and reduced interestaccruals due to changes in the timing of interest payments on our permanentfinancing, partially offset by reduced bonus payments. Historically, the firstquarter is a period of investment for many of the Company’s businesses as theyprepare for the summer and fall production season. This pattern continued inboth the 2009 and 2008 first quarters.

 

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***Cash Flows from Investing Activities from ContinuingOperations***

 

Netcash used for investing activities from continuing operations was $20.1 millionfor the first quarter of 2009 compared to $14.5 million for the firstquarter of 2008. Net cash used for investing activities included$0.5 million and $16.2 million paid in connection with the Merger forthe first quarter of 2009 and 2008, respectively. Amounts paid in connectionwith the Merger in 2008 were primarily related to payments under change incontrol agreements.

 

Capitalexpenditures increased to $18.6 million for the three months ended March 31,2009 from $9.0 million for the three months ended March 31, 2008 andincluded vehicle purchases of $10.4 million, recurring capital needs andinformation technology projects. The Company anticipates that capitalexpenditures for the remainder of 2009 will total approximately$55 million to $65 million, reflecting the purchases of vehicles andthe continuation of investments in information systems and productivityenhancing operating systems. The Company has no additional material capitalcommitments at this time.

 

Acquisitions,excluding the Merger, for the three months ended March 31, 2009 totaled$4.9 million, compared with $4.4 million for the three months ended March 31,2008. Consideration paid for tuck-in acquisitions consisted of cash paymentsand debt payable to sellers. The Company expects to continue its tuck-inacquisition program at Terminix, TruGreen LawnCare and Merry Maids.

 

Thechange in notes receivable, financial investments and securities for the threemonths ended March 31, 2009 and 2008 includes the net sales of marketablesecurities at American Home Shield due in part to lowering the amount of excessreserves over minimum statutory reserve requirements in certain states inaccordance with our investment policy, reduced statutory reserve requirements,and the sale of certain marketable securities and the subsequent investment inrepurchase agreements in an effort to limit our exposure to changing marketconditions.

 

***Cash Flows from Financing Activities from ContinuingOperations***

 

Netcash (used for) provided from financing activities from continuing operationswas ($47.7) million for the first quarter of 2009 compared to$23.6 million for the first quarter of 2008. During the first quarter of2009, the Company completed open market purchases of $89.0 million in facevalue of our Permanent Notes for a cost of $41.0 million, of which $79.0million in face value for a cost of $36.0 million settled during the quarter.The Company also made scheduled principal payments of long-term debt of $11.5million in the first quarter of 2009. During the first quarter of 2008, theCompany made borrowings of $76.4 million and repayments of $31.4 million underthe Revolving Credit Facility reflecting normal seasonal working capital needsand made scheduled principal payments of long-term debt of $21.4 million.

 

***Liquidity***

 

TheMerger was completed on the Closing Date. Following the completion of theMerger, the Company is highly leveraged, and a very substantial portion of theCompany’s liquidity needs arise from debt service on indebtedness incurred inconnection with the Merger and from funding the Company’s operations, workingcapital and capital expenditures. Equity contributions totaling$1,431 million from the Equity Sponsors, together with (i) borrowingsunder the $1,150 million Interim Loan Facility, (ii) borrowings under anew $2,650 million senior secured term loan facility and (iii) cashon hand at ServiceMaster, were used, among other things, to finance theaggregate Merger Consideration, to make payments in satisfaction of otherequity-based interests in ServiceMaster under the Merger Agreement, to settleexisting interest rate swaps, to redeem or provide for the repayment of certainof the Company’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150 millionpre-funded letter of credit facility were used to replace and/or secure lettersof credit previously issued under a ServiceMaster credit facility that wasterminated as of the Closing Date. On the Closing Date, the Company also enteredinto, but did not draw under, the $500 million Revolving Credit Facility.

 

Theagreements governing the Term Facilities, the Permanent Notes and the RevolvingCredit Facility contain certain covenants that limit or restrict the incurrenceof additional indebtedness, debt repurchases, liens, sales of assets, certainpayments (including dividends) and transactions with affiliates, subject tocertain exceptions. The Company was in compliance with the covenants underthese agreements at March 31, 2009.

 

TheInterim Loan Facility matured on July 24, 2008. On the maturity date,outstanding amounts under the Interim Loan Facility were converted on a one toone basis into the Permanent Notes. The Permanent Notes were issued pursuant toa refinancing indenture. In connection with the issuance of Permanent Notes,ServiceMaster entered into a Registration Rights Agreement, pursuant to whichServiceMaster filed with the SEC a registration statement with respect to theresale of the 

 

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Permanent Notes, whichwas declared effective on January 16, 2009.  ServiceMaster’s obligation under theRegistration Rights Agreement to keep the registration statement effective hasterminated. Accordingly, ServiceMaster may choose to deregister the PermanentNotes and terminate the effectiveness of the registration statement at anytime.

 

ThroughJuly 15, 2011, the Company may, at its option prior to the start of anyinterest period, elect to pay interest on outstanding amounts under thePermanent Notes entirely in cash (“Cash Interest”), entirely by increasing theprincipal amount of the outstanding loans (“PIK Interest”), or 50% as CashInterest and 50% as PIK Interest. Interest payable after July 15, 2011 ispayable entirely as Cash Interest. The Company elected to pay interest payablein 2009 entirely as Cash Interest.

 

Cashand short-term and long-term marketable securities totaled $411.2 million at March 31,2009, compared with $538.6 million at December 31, 2008. Approximately$255.1 million and $244.5 million of the cash and short-term and long-termmarketable securities balance as of March 31, 2009 and December 31,2008, respectively, is associated with regulatory requirements at American HomeShield and for other purposes. For example, the payment of ordinary andextraordinary dividends to ServiceMaster by our subsidiaries that are regulatedas insurance, home warranty or similar companies is subject to applicable statelaw limitations. American Home Shield’s investment portfolio has been investedin a combination of high quality, short duration fixed income securities andequities. The Company closely monitors the performance of the investments. Fromtime to time, the Company reviews the statutory reserve requirements to whichits regulated entities are subject and any changes to such requirements. Thesereviews may result in identifying current reserve levels above or below minimumstatutory reserve requirements, in which case the Company may adjust itsreserves. The reviews may also identify opportunities to satisfy certainregulatory reserve requirements through alternate financial vehicles, whichwould enhance our liquidity.

 

Aportion of the Company’s vehicle fleet and some equipment are leased throughoperating leases. The lease terms are non-cancelable for the first twelve-monthterm, and then are month-to-month, cancelable at the Company’s option. Thereare residual value guarantees by the Company (ranging from 70 percent to84 percent of the estimated terminal value at the inception of the leasedepending on the agreement) relative to these vehicles and equipment, whichhistorically have not resulted in significant net payments to the lessors. At March 31,2009, there was approximately $103 million of residual value relating tothe Company’s fleet and equipment leases. The fair value of the assets underall of the fleet and equipment leases is expected to substantially mitigate theCompany’s guarantee obligations under the agreements. At March 31, 2009,the Company has recorded the estimated fair value of this guarantee ofapproximately $2 million in the condensed consolidated statement offinancial position. We expect to fulfill our ongoing vehicle fleet needsthrough direct purchases of vehicles.

 

TheCompany maintains lease facilities with banks totaling $65 million, whichprovide for the financing of branch properties to be leased by the Company. At March 31,2009, approximately $65 million was funded under these facilities.Approximately $12 million of these leases are treated as capital leases andhave been included on the balance sheet as assets with related debt as of March 31,2009. The balance of the funded amount is treated as operating leases. TheCompany has guaranteed the residual value of the properties under the leases upto 73 percent of the fair market value at the commencement of the lease.At March 31, 2009, the Company’s residual value guarantee related to theleased assets totaled $53 million, for which the Company has recorded theestimated fair value of this guarantee of approximately $0.1 million inthe condensed consolidated statements of financial position. In connection withthe closing of the Merger, the Company amended these leases effective July 24,2007. Among the modifications, the Company extended the lease terms through July 24,2010. The operating lease and capital lease classifications of these leases didnot change as a result of the modifications.

 

TheCompany holds certain financial instruments that are measured at fair value ona recurring basis. The fair values of these instruments are measured using boththe market and income approaches. For investments in marketable securities,deferred compensation trust assets and derivative contracts, which are carriedat their fair values, the Company’s fair value estimates incorporate quotedmarket prices, other observable inputs (for example, interest rates) andunobservable inputs (for example, forward commodity prices) at the balancesheet date.

 

Underthe terms of its fuel swap contracts, the Company is required to postcollateral in the event that the fair value of the contracts exceeds a certainagreed upon liability level. As of March 31, 2009, the fair value of theCompany’s fuel swap contracts was a liability of $21.2 million and the Companyposted approximately $23.5 million in letters of credit as collateral for thesecontracts, $5.0 million of which were posted under the Company’s RevolvingCredit Facility. The continued use of letters of credit for this purpose couldlimit the Company’s ability to post letters of credit for other purposes andcould limit the Company’s borrowing availability under the Revolving CreditFacility. However, the Company does not expect the fair value of itsoutstanding fuel swap contacts to materially impact its financial position orliquidity.

 

TheCompany’s ongoing liquidity needs are expected to be funded by net cashprovided by operating activities and, as required, borrowings under theRevolving Credit Facility and accounts receivable securitization arrangement.We expect

 

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that cash provided fromoperations and available capacity under the Revolving Credit Facility andaccounts receivable securitization arrangement will provide sufficient funds tooperate our business, make expected capital expenditures and meet ourforeseeable liquidity requirements, including payment of interest and principalon our debt. As of March 31, 2009, the Company had $313.3 million ofremaining capacity available under the Revolving Credit Facility and $23.4million of remaining capacity under the accounts receivable securitizationarrangement.

 

The Company mayfrom time to time repurchase or otherwise retire the Company’s debt and takeother steps to reduce the Company’s debt or otherwise improve the Company’sfinancial position. These actions may include open market debt repurchases,negotiated repurchases and other retirements of outstanding debt. The amount ofdebt that may be repurchased or otherwise retired, if any, will depend onmarket conditions, trading levels of the Company’s debt from time to time, theCompany’s cash position and other considerations. Affiliates of the Company mayalso purchase the Company’s debt from time to time, through open marketpurchases or other transactions. In such cases, the Company’s debt may not beretired, in which case the Company would continue to pay interest in accordancewith the terms of the debt and the Company would continue to reflect the debtas outstanding in its statement of financial position.

 

The Company wasadvised by Holdings that, during the first quarter of 2009, Holdings completedopen market purchases of $11.0 million in face value of our PermanentNotes for a cost of $4.5 million. As of March 31, 2009,Holdings has completed open market purchases totaling $65.0 million inface value of our Permanent Notes for a cost of $21.4 million. The debtacquired by Holdings has not been retired, and the Company has continued to payinterest in accordance with the terms of the debt. During the first quarter of2009, the Company recorded interest expense of $1.7 million and made cashpayments to Holdings of $3.0 million. Interest accrued by the Company andpayable to Holdings as of March 31, 2009 amounted to $1.4 million.

 

During the firstquarter of 2009, the Company completed open market purchases of $89.0 millionin face value of our Permanent Notes for a cost of $41.0 million. The debtacquired by the Company has been retired, and the Company has discontinued thepayment of interest. The Company recorded a gain on extinguishment of debt of$46.1 million in its condensed consolidated statement of operations forthe first quarter of 2009 related to these retirements. Included in the gain onextinguishment of debt are write-offs of unamortized debt issuance costsrelated to the extinguished debt of $1.9 million.

 

Inlight of the uncertainty in the credit and financial markets, in September 2008,we borrowed $165 million under our existing $500 million Revolving CreditFacility to increase our cash position to preserve our financial flexibility.ServiceMaster has invested $125 million of the borrowings in money market fundswhich are invested in short term U.S. Government securities and placed theremaining borrowings in a money market account used to fund working capitalneeds.

 

The Company hasentered into an accounts receivable securitization arrangement under whichTruGreen LawnCare and Terminix sell certain eligible trade accounts receivableto Funding, the Company’s wholly-owned, bankruptcy-remote subsidiary which isconsolidated for financial reporting purposes. Funding, in turn, may transfer,on a revolving basis, an undivided percentage ownership interest of up to$50 million in the pool of accounts receivable to one or both of thePurchasers. The amount of the eligible receivables varies during the year basedon seasonality of the business and could, at times, limit the amount availableto the Company from the sale of these interests.

 

The accounts receivablesecuritization arrangement is a 364-day facility that is renewable annually atthe option of Funding, with a final termination date of July 17, 2012.Only one of the Purchasers is required to purchase interests under thearrangement. If this Purchaser were to exercise its right to terminate itsparticipation in the arrangement, which it may do in the third quarter of eachyear, the amount of cash available to the Company may be reduced or eliminated.

 

During the first quarterof 2009 and 2008, there were no transfers of interests in the pool of accountsreceivables to Purchasers under this arrangement. As of March 31, 2009,the Company had $10.0 million outstanding under the arrangement and had$23.4 million of remaining capacity available under the accountsreceivable securitization arrangement. As of March 31, 2008, there were noamounts outstanding under the arrangement.

 

As aholding company, we depend on our subsidiaries to distribute funds to us sothat we may pay our obligations and expenses, including our debt serviceobligations. The ability of our subsidiaries to make distributions anddividends to us depends on their operating results, cash requirements andfinancial condition and general business conditions. As previously described,certain of our subsidiaries are subject to legal and regulatory restrictions onthe payment of dividends to us.

 

TheCompany’s Annual Report on Form 10-K for the year ended December 31,2008 included disclosure of the Company’s contractual obligations andcommitments as of December 31, 2008. The Company continues to make thecontractually required payments and, therefore, the 2009 obligations andcommitments as listed in the Company’s Annual

 

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Report on Form 10-Kfor the year ended December 31, 2008 have been reduced by the requiredpayments. There were no material changes outside of the ordinary course ofbusiness in the Company’s previously disclosed contractual obligations andcommitments during the three months ended March 31, 2009.

 

***Financial Position—Continuing Operations***

 

Receivablesdecreased from year-end levels, reflecting increased accounts receivablecollections offset in part by accounts receivable growth as a result ofincreased seasonal activity.

 

Inventoriesincreased from year-end levels, reflecting increased seasonal activity.

 

Prepaidexpenses and other assets increased from year-end levels primarily reflectingpreseason advertising costs at TruGreen LawnCare as well as costs of annualrepair and maintenance procedures that are performed primarily in the firstquarter at TruGreen LawnCare. These costs are deferred and recognized over theproduction season and are not deferred beyond the calendar year end.

 

Deferredcustomer acquisition costs increased from year-end levels, reflecting theseasonality in the lawn care operations. In the winter and spring, thisbusiness sells a series of lawn applications to customers, which are renderedprimarily in March through October. Certain incremental selling expenseswhich relate to successful sales are deferred and recognized over theproduction season and are not deferred beyond the calendar year-end. TheCompany capitalizes sales commissions and other direct contract acquisitioncosts relating to lawn care, termite baiting and pest contracts, as well ashome warranty agreements. These costs vary with and are directly related to anew sale and are amortized over the life of the related contract.

 

Propertyand equipment increased from year-end levels, reflecting vehicle purchases,other recurring capital purchases and information technology projects.

 

Accountspayable increased from year-end levels, reflecting increased seasonal activity.

 

Deferredrevenue increased from year-end levels, reflecting the significant amount of customerprepayments recorded in the first quarter (pre-season) at TruGreen LawnCare.

 

Accruedself-insured claims and related expenses decreased from year-end levels,reflecting a reduction in required reserve levels under certain of ourself-insurance programs.

 

Accruedpayroll and related expenses decreased from year-end levels, reflecting thefirst quarter 2009 payment of incentive compensation related to 2008performance.

 

Otheraccrued liabilities decreased from year-end levels due primarily to reductionsin accrued interest due to changes in the timing of interest payments on ourpermanent financing.

 

Otherlong-term obligations, primarily self-insured claims, increased from year-endlevels due primarily to an increase in the fair value liability of our interestrate swap contracts.

 

Totalshareholder’s equity was $1,134.4 million at March 31, 2009 as compared to$1,132.4 million at December 31, 2008.

 

***Financial Position—Discontinued Operations***

 

Theassets and liabilities related to discontinued operations have been classifiedin a separate caption on the condensed consolidated statements of financialposition.

 

Aspart of the InStar, American Residential Services and American MechanicalServices sale agreements, the Company guaranteed obligations to third partieswith respect to bonds (primarily performance and license type), operatingleases for which the Company has been released as being the primary obligor,real estate leased and operated by the buyers, and other guarantees of payment.At the present time, the Company does not believe it is probable that thebuyers will default on their obligations subject to guarantee. The fair valueof the Company’s obligations related to these guarantees is not significant andno liability has been recorded.

 

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**InformationRegarding Forward-Looking Statements**

 

This reportincludes forward-looking statements and cautionary statements. Some of theforward-looking statements can be identified by the use of forward-lookingterms such as “believes,” “expects,” “may,” “will,” “shall,” “should,” “would,”“could,” “seek,” “intends,” “plans,” “estimates,” “anticipates” or othercomparable terms. These forward-looking statements include all matters that arenot historical facts. They appear in a number of places throughout this reportand include, without limitation, statements regarding our intentions, beliefsor current expectations concerning, among other things, our results ofoperations; financial condition; liquidity; prospects; growth strategies; theindustries in which we operate; capital expenditures; customer retention;employee selection, training and retention; communications improvements; thecontinuation of tuck-in acquisitions; the impact of fuel swaps; the amounts wewill pay in connection with outsourcing of information technology services,restructurings and reorganizations, including Fast Forward, the cost savingsfrom such restructurings and reorganizations and expected charges related tosuch restructurings and reorganizations; and the impact of prevailing economicconditions.

 

Forward-lookingstatements are subject to known and unknown risks and uncertainties, many of whichmay be beyond our control. We caution you that forward-looking statements arenot guarantees of future performance or outcomes and that actual outcomes andperformances, including, without limitation, our actual results of operations,financial condition and liquidity, and the development of the industries inwhich we operate may differ materially from those made in or suggested by theforward-looking statements contained in this report. In addition, even if ourresults of operations, financial condition and liquidity, and the developmentof the industries in which we operate are consistent with the forward-lookingstatements contained in this report, those results or developments may not beindicative of results or developments in subsequent periods. A number ofimportant factors, including the risks and uncertainties discussed inItem 1A—Risk Factors in Part I in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008, could cause actual results andoutcomes to differ materially from those in the forward-looking statements.Factors that could cause actual results and outcomes to differ from thosereflected in forward-looking statements include, without limitation:

 

·                  the effects of our substantial indebtedness and the limitations containedin the agreements governing such indebtedness;

 

·                  our ability to generate the significant amount of cash needed to fundour operations and service our debt obligations and debt repurchases;

 

·                  our ability to secure sources of financing or other funding to allowfor direct purchases of commercial vehicles;

 

·                  changes in interest rates;

 

·                  weather conditions and seasonality factors that affect the demand forour services;

 

·                  changes in the source and intensity of competition in our markets;

 

·                  higher commodity prices and lack of availability, including fuel andfertilizers;

 

·                  increases in operating costs, such as higher insurance premiums,self-insurance costs and health care costs;

 

·                  employee retention, labor shortages or increases in compensation andbenefits costs;

 

·                  epidemics, pandemics or other public health concerns or crises;

 

·                  the risk that the benefits from the Merger or Fast Forward may not befully realized or may take longer to realize than expected;

 

·                  a continued downturn in general economic, financial and creditconditions in the United States and elsewhere (including further deteriorationor disruption in the credit and financial markets), especially as such adownturn may affect home resales, consumer or business liquidity, consumer orcommercial confidence or spending levels including as a result of inflation ordeflation, unemployment, interest rate fluctuations, mortgage foreclosures,subprime credit dislocations;

 

·                  a failure of any banking institution with which we deposit our funds orany insurance company that provides insurance to us;

 

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·                  changes in the type or mix of our service offerings or products;

 

·                  existing and future governmental regulation and the enforcementthereof, including regulation relating to restricting or banning oftelemarketing, direct mail or other marketing activities, the TermiteInspection Protection Plan, pesticides and/or fertilizers;

 

·                  the success of our current restructuring initiatives, including theimplementation of centers of excellence;

 

·                  the number, type, outcomes and costs of legal or administrativeproceedings;

 

·                  possible labor organizing activities at the Company or its franchisees;

 

·                  risks inherent in acquisitions and dispositions;

 

·                  the timing and structuring of our business process outsourcing,including the outsourcing of portions of our information technology function,and risks associated with such outsourcing; and

 

·                  other factors described from time to time in documents that we filewith the Securities and Exchange Commission.

 

You should readthis report completely and with the understanding that actual future resultsmay be materially different from expectations. All forward-looking statementsmade in this report are qualified by these cautionary statements. Theseforward-looking statements are made only as of the date of this report, and wedo not undertake any obligation, other than as may be required by law, toupdate or revise any forward-looking statements to reflect changes inassumptions, the occurrence of events, unanticipated or otherwise, changes infuture operating results over time or otherwise.

 

Comparisons of results for current and any prior periods are not intendedto express any future trends, or indications of future performance, unlessexpressed as such, and should only be viewed as historical data.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

*InterestRate Risk*

 

TheCompany is exposed to the impact of interest rate changes and manages thisexposure through the use of variable-rate and fixed-rate debt and by utilizinginterest rate swaps. The Company does not enter into contracts for trading orspeculative purposes. The market risk associated with debt obligations andother significant instruments as of March 31, 2009 has not materiallychanged from December 31, 2008 (see Item 7A of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2008).

 

*Fuel Price Risk*

 

The Company is exposed to market risk for changes in fuelprices through the consumption of fuel by its vehicle fleet in the delivery ofservices to its customers. The Company uses approximately 28 million gallons offuel on an annual basis. A 10% change in fuel prices would result in a changeof approximately $6 million in the Company’s annual fuel cost beforeconsidering the impact of fuel swap contracts.

 

The Company uses fuel swap contracts to mitigate thefinancial impact of fluctuations in fuel prices. As of March 31, 2009, theCompany had fuel swap contracts to pay fixed prices for fuel with an aggregatenotional amount of $121.6 million, maturing through 2010. The estimated fairvalue of these contracts at March 31, 2009 was a liability of $21.2million. These fuel swap contracts provide a fixed price for approximately 89%and 75% of the Company’s estimated fuel usage for the remainder of 2009 and2010, respectively.

 

##### **ITEM 4T. CONTROLS AND PROCEDURES**

##### ** **

##### **Effectiveness ofDisclosure Controls and Procedures.**ServiceMaster’s Chief ExecutiveOfficer, J. Patrick Spainhour, and ServiceMaster’s Senior Vice President andChief Financial Officer, Steven J. Martin, have evaluated ServiceMaster’sdisclosure controls and procedures (as defined in Rule 15d-15(e)) as ofthe end of the period covered by this Quarterly Report on Form 10-Q.ServiceMaster’s disclosure controls and procedures include a roll-up offinancial and non-financial reporting that is consolidated in the principalexecutive office of ServiceMaster in Memphis, Tennessee. 

 

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##### **Messrs. Spainhourand Martin have concluded that both the design and operation of ServiceMaster’sdisclosure controls and procedures are effective.**

##### ** **

##### **Changes in Internal Controlover Financial Reporting.**No change in ServiceMaster’sinternal control over financial reporting occurred during the first quarter of2009 that has materially affected, or is reasonably likely to materiallyaffect, ServiceMaster’s internal control over financial reporting.

##### ** **

**PART II.OTHER INFORMATION**

 

**ITEM 6: EXHIBITS**

** **
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                     |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                     |
| 31.1                 |       | Certification of  Chief Executive Officer Pursuant to Rule 15d — 14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             |
|                 |       |                                                                                                                                                                                                     |
| 31.2                 |       | Certification of  Chief Financial Officer Pursuant to Rule 15d — 14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             |
|                 |       |                                                                                                                                                                                                     |
| 32.1                 |       | Certification of  Chief Executive Officer Pursuant to Section 1350 of Chapter 63 of Title  18 of the United States Code, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|                 |       |                                                                                                                                                                                                     |
| 32.2                 |       | Certification of  Chief Financial Officer Pursuant to Section 1350 of Chapter 63 of Title  18 of the United States Code, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

**SIGNATURE**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

Date: May 15,2009
|   | THE  SERVICEMASTER COMPANY                         |
|--------|----------------------------------------------------|
|   | (Registrant)                                       |
|   |                                               |
|   | By:                                                | /s/ Steven J.  Martin |
|   | Steven J. Martin                                   |
|   | Senior Vice  President and Chief Financial Officer |

 

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